S-1/A 1 forms-1a.htm

 

As filed with the Securities and Exchange Commission on February 8, 2021

 

Registration No. 333-252059

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

 

STAFFING 360 SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7363   68-0680859

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

641 Lexington Avenue

27th Floor

New York, NY 10022

(646) 507-5710

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Brendan Flood

Chairman and Chief Executive Officer

Staffing 360 Solutions, Inc.

641 Lexington Avenue, 27th Floor

New York, New York 10022

(646) 507-5710

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

 

Rick A. Werner, Esq.

Jayun Koo, Esq.

Haynes and Boone, LLP

30 Rockefeller Plaza, 26th Floor

New York, New York 10112

(212) 659-7300

Gregory Sichenzia, Esq.

Sichenzia Ross Ference LLP

1185 Avenue of the Americas, 37th Floor

New York, New York 10036

(212) 930-9700

 

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]   Accelerated filer [  ]
         
Non-accelerated filer [X]   Smaller reporting company [X]
         
      Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. [  ]

 

Calculation of Registration Fee

 

Title of Each Class of

Securities to be

Registered

  Amount to be Registered(1)    

Proposed Maximum

Offering

Price per Share(2)

    Proposed Maximum
Aggregate Offering
Price
   

Amount of Registration

Fee(3)

 
Common stock, $0.00001 par value(4)         $     $     $  
Pre-funded warrants to purchase shares of common stock(4)                                
Common stock issuable upon the exercise of pre-funded warrants(4)(5)                               —  
Total     21,855,280     $ 0.85     $ 18,576,988     $ 2,027  

 

(1) Pursuant to Rule 416(a) under the Securities Act of 1933, as amended (the “Securities Act”), this registration statement shall also cover an indeterminate number of shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions.

(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended.

(3) Calculated in accordance with Rule 457(c) under the Securities Act and based upon the average of the high and low sale prices of our shares of common stock on the Nasdaq Capital Market on February 1, 2021.

(4) The proposed maximum number of shares of common stock proposed to be sold in the offering will be reduced on a one-for-one basis based on the number of the pre-funded warrants offered and sold in the offering, and the proposed maximum number of the pre-funded warrants to be sold in the offering will be reduced on a one-for-one basis based on the number of shares of common stock sold in the offering. Accordingly, the proposed maximum number of the shares of common stock (including the shares of common stock issuable upon the exercise of the pre-funded warrants), if any, is 21,855,280.

(5) No additional registration fee is payable pursuant to Rule 457(i) under the Securities Act of 1933, as amended.

(6) A filing fee of $1,759 was previously paid.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 
 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated February 8, 2021

 

Preliminary Prospectus

 

Staffing 360 Solutions, Inc.

 

21,855,280 Shares of Common Stock

Pre-Funded Warrants to Purchase up to 21,855,280 Shares of Common Stock

Up to 21,855,280 Shares of Common Stock Underlying the Pre-Funded Warrants

 

We are offering 21,855,280 shares of our common stock pursuant to this prospectus.

 

We are also offering to certain purchasers whose purchase of shares of common stock in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common stock immediately following the consummation of this offering, the opportunity to purchase, if any such purchaser so chooses, pre-funded warrants, in lieu of shares of common stock that would otherwise result in such purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock. The purchase price of each pre-funded warrant will be equal to the price per share at which shares of common stock are sold to the public in this offering, minus $0.0001, and the exercise price of each pre-funded warrant will be $0.0001 per share. This offering also relates to the shares of common stock issuable upon exercise of any pre-funded warrants sold in this offering. The pre-funded warrants will be exercisable immediately and may be exercised at any time until all of the pre-funded warrants are exercised in full. For each pre-funded warrant we sell, the number of shares of common stock we are offering will be decreased on a one-for-one basis.

 

Our common stock is listed on The Nasdaq Capital Market (“Nasdaq”) under the symbol “STAF.” We have assumed a public offering price of $1.01 per share, the last reported sale price of our common stock on Nasdaq on February 4, 2021, and $1.0099 per pre-funded warrant. On February 5, 2021, the last closing price of our common stock was $1.11 per share. The public offering price per share and any pre-funded warrant, as the case may be, will be determined through negotiation between us and the investors in the offering based on market conditions at the time of pricing, and may be at a discount to the current market price of our common stock. Therefore, the assumed public offering price used throughout this prospectus may not be indicative of the final offering price. There is no established trading market for the pre-funded warrants, and we do not expect a market to develop. We do not intend to apply for a listing for the pre-funded warrants on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the pre-funded warrants will be limited.

 

Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 6 of this prospectus for a discussion of risks that should be considered in connection with an investment in our securities.

 

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

   Per Share   Per Pre-Funded Warrant   Total 
Public offering price  $       $         $     
Placement agent’s fees(1)  $   $   $ 
Proceeds to us, before expenses  $   $   $ 

 

(1) We have agreed to pay the placement agent a cash fee equal to 7.5% of the gross proceeds raised in this offering, and to reimburse the placement agent for certain of its offering-related expenses. In addition, we have agreed to issue the placement agent or its designees warrants to purchase a number of shares of common stock equal to 7.5% of the shares of common stock sold in this offering (including the shares of common stock issuable upon the exercise of the pre-funded warrants), at an exercise price of $        per share, which represents 125% of the public offering price per share. See “Plan of Distribution” for a description of the compensation to be received by the placement agent.

 

We have engaged H.C. Wainwright & Co., LLC (“Wainwright” or the “placement agent”) to act as our exclusive placement agent in connection with this offering. The placement agent is not purchasing or selling the securities offered by us and is not required to sell any specific number or dollar amount of securities, but the placement agent will use its reasonable best efforts to arrange for the sale of the securities offered by this prospectus. Because there is no minimum offering amount required as a condition to closing in this offering, the actual public offering amount, placement agent fees, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum offering amounts set forth above. In either event, this offering may be closed without further notice to you.

 

Delivery of the securities offered hereby is expected to be made on or about                , 2021, subject to satisfaction of customary closing conditions.

 

H.C. Wainwright & Co.

 

The date of this prospectus is                     , 2021

 

 
 

 


TABLE OF CONTENTS

 

PROSPECTUS SUMMARY 1
THE OFFERING 4
RISK FACTORS 6
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 23
USE OF PROCEEDS 24
DIVIDEND POLICY 25
DILUTION 26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 29
BUSINESS 43
MANAGEMENT 47
EXECUTIVE AND DIRECTOR COMPENSATION 50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 59
DESCRIPTION OF SECURITIES WE ARE OFFERING 61
PLAN OF DISTRIBUTION 67
LEGAL MATTERS 68
EXPERTS 68
WHERE YOU CAN FIND ADDITIONAL INFORMATION 68
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 70

 

The registration statement we filed with the SEC includes exhibits that provide more detail of the matters discussed in this prospectus. You should read this prospectus and the related exhibits filed with the SEC before making your investment decision. You should rely only on the information provided in this prospectus. In addition, this prospectus contains summaries of certain provisions contained in some of the documents described herein, but reference is made to the actual documents for complete information. All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed, will be filed or will be incorporated by reference as exhibits to the registration statement of which this prospectus is a part, and you may obtain copies of those documents as described below under the heading “Where You Can Find Additional Information.”

 

We have not, and the placement agent has not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of our securities. Our business, financial condition, results of operations and prospects may have changed since that date.

 

This prospectus is an offer to sell only the securities offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. We are not, and the placement agent is not, making an offer to sell these securities in any state or jurisdiction where the offer or sale is not permitted.

 

i
 

 

PROSPECTUS SUMMARY

 

This summary provides an overview of selected information contained elsewhere and does not contain all of the information you should consider before investing in our securities. You should carefully read the prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our securities, including the information discussed under “Risk Factors” in this prospectus and our financial statements and notes thereto that are included elsewhere in this prospectus. Some of the statements in this prospectus constitute forward-looking statements that involve risks and uncertainties. See information set forth under the section “Special Note Regarding Forward-Looking Statements.” As used in this prospectus, unless the context otherwise indicates, the terms “we,” “our,” “us,” or the “Company” refer to Staffing 360 Solutions, Inc., a Delaware corporation, and its subsidiaries taken as a whole.

 

Overview

 

We are an international staffing company engaged in the acquisition of United States and United Kingdom based staffing companies. Our services principally consist of providing temporary contractors, and, to a much lesser extent, the recruitment of candidates for permanent placement. As part of our consolidation model, we pursue a broad spectrum of staffing companies supporting primarily accounting and finance, information technology, engineering, administration and commercial disciplines. Our business model is based on finding and acquiring, suitable, mature, profitable, operating, domestic and international staffing companies. Our targeted consolidation model is focused specifically on the accounting and finance, information technology, engineering, administration and light industrial disciplines. We have completed ten acquisitions since November 2013.

 

Recent Developments

 

COVID-19

 

In December 2019, a strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has spread globally, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in affected countries. The COVID-19 pandemic is impacting worldwide economic activity, and activity in the United States and the United Kingdom where our operations are based. Much of the independent contractor work we provide to our clients is performed at the site of our clients. As a result, we are subject to the plans and approaches our clients have made to address the COVID-19 pandemic, such as whether they support remote working or if they have simply closed their facilities and furloughed employees. To the extent that our clients were to decide or are required to close their facilities, or not permit remote work when they close facilities, we would no longer generate revenue and profit from that client. In addition, in the event that our clients’ businesses suffer or close as a result of the COVID-19 pandemic, we may experience decline in our revenue or write-off of receivables from such clients. Moreover, developments such as social distancing and shelter-in-place directives have impacted our ability to deploy our staffing workforce effectively, thereby impacting contracts with customers in our commercial staffing and professional staffing business streams, where we have had declines in revenues during Q2 2020 and Q3 2020 and may have declines during Q4 2020 compared to the respective periods in 2019. While some government-imposed precautionary measures have been relaxed in certain countries or states, more strict measures have been or may be put in place again due to a resurgence in COVID-19 cases, as has occurred recently in the United Kingdom in response to the spread of a new strain of COVID-19. As a result of the newly imposed government restrictions in the United Kingdom, we had to close both of our offices in the United Kingdom, and our employees have been forced to operate remotely from their homes. Therefore, the ongoing COVID-19 pandemic may continue to affect our operation and to disrupt the marketplace in which we operate and may negatively impact our sales in fiscal year 2021 and our overall liquidity.

 

While the ultimate economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others, the pandemic has resulted in significant disruptions in the general commercial activity and the global economy and caused financial market volatility and uncertainty in significant and unforeseen ways in the recent months. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital and on the market price of our common stock, and we may not be able to successfully raise needed capital. If we are unsuccessful in raising capital in the future, we may need to reduce activities, curtail or cease operations.

 

1

 

 

 

In addition, the continuation of the COVID-19 pandemic or an outbreak of other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations.

 

Nasdaq Minimum Stockholders’ Equity Requirement

 

On June 3, 2020, we received a letter from the Listing Qualifications Department notifying us that we are no longer in compliance with the minimum stockholders’ equity requirement for continued listing on Nasdaq. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2.5 million. Further, as of June 9, 2020, we did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations.

 

In accordance with the Nasdaq Listing Rules, we were afforded the opportunity to submit a plan to regain compliance with the minimum stockholders’ equity standard. Based on our submissions, the Listing Qualifications Department granted us an extension to regain compliance with Rule 5550(b)(1) until November 30, 2020.

 

On December 1, 2020, we received notice that because we had not met the terms of the extension, our common stock would be subject to delisting from Nasdaq, unless we timely requested a hearing before a Nasdaq Hearings Panel (the “Panel”). We timely requested a hearing before the Panel, which automatically stayed any suspension or delisting action pending the issuance of a decision by the Panel following the hearing and the expiration of any additional extension period granted by the Panel. The hearing occurred on January 21, 2021. At the hearing, we provided the Panel with an update on our compliance plan and requested a further extension of time in which to regain compliance. On February 3, 2021, we received a letter from the Panel noting it has granted our request for an extension until February 28, 2021 to regain compliance with the minimum $2.5 million stockholders’ equity requirement, or the alternative compliance standards as set forth in Nasdaq Listing Rule 5550(b)(1).

 

Although we are taking actions intended to restore our compliance with the listing requirements, we can provide no assurance that any action taken by us will be successful. Should a delisting occur, an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of our common stock, and our ability to raise future capital through the sale of our common stock could be severely limited. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities.

 

December 2020 Public Offering

 

On December 29, 2020, we closed the sale of an aggregate of 4,816,665 shares of common stock in an underwritten public offering, or the December 2020 Public Offering, at an offering price to the public of $0.60 per share. We received net proceeds from the December 2020 Public Offering, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us, of approximately $2.4 million. We used 75% of the net proceeds from such underwritten offering to redeem a portion of our outstanding Second Amended and Restated 12% Senior Secured Note due September 30, 2022 (the “Jackson Note”), and 25% of the net proceeds from such underwritten offering to redeem a portion of our Series E Convertible Preferred Stock (“Base Series E Preferred Stock”).

 

December 2020 Registered Direct Offering

 

On December 31, 2020, we closed the sale of an aggregate of 2,662,596 shares of common stock in a registered direct offering, or the December 2020 Registered Direct Offering, at an offering price of $0.655 per share. We received net proceeds from the December 2020 Registered Direct Offering, after deducting placement agent fees and other estimated offering expenses payable by us, of approximately $1.5 million. We used 75% of the net proceeds from such registered direct offering to redeem a portion of our outstanding Jackson Note, and 25% of the net proceeds from such registered direct offering to redeem a portion of our Base Series E Preferred Stock.

 

Jackson Waivers

 

On February 5, 2021, we entered into a Limited Consent and Waiver with Jackson Investment Group, LLC (“Jackson”) whereby, among other things, Jackson agreed that we may use 75% of the proceeds from this offering to redeem a portion of the Jackson Note, which currently has an outstanding principal amount and accrued interest of $32,710,485, and 25% of the net proceeds from this offering to redeem a portion of our Base Series E Preferred Stock notwithstanding certain provisions of the certificate of designation for the Base Series E Preferred Stock that would have required us to use all the proceeds from this offering to redeem the Base Series E Preferred Stock. In addition, we also agreed in the Limited Consent and Waiver to additional limits on our ability to incur other indebtedness, including limits on advances under our revolving loan facility with MidCap Funding Trust. We also agreed that to the extent that any of our PPP Loans are forgiven after this offering, Jackson may convert the Base Series E Preferred Stock and Series E-1 Preferred Stock that remains outstanding into a secured note that is substantially similar to the Jackson Note.

 

Jackson also entered into a Limited Waiver and Agreement with us on February 5, 2021, whereby Jackson agreed that it would not convert any shares of the Base Series E Preferred Stock or Series E-1 Preferred Stock into shares of our common stock or exercise any warrants to purchase shares to the extent that doing so would cause the number of our authorized shares of common stock to be less than the number of shares being offered pursuant to this prospectus. Jackson also waived any event of default under the Series E Certificate of Designation and the Jackson Note that would result from the Company have an insufficient number of authorized shares of common stock to honor conversions of the Base Series E Preferred Stock and exercise of Jackson’s warrants.

 

 

2

 

 

 

Risk Factor Summary

 

This summary does not address all of the risks that we face. Additional discussions of the risks summarized in this risk factor summary, and other risks that we face, can be found below and should be carefully considered, together with other information in this prospectus before making investment decisions.

 

  The recent COVID-19 pandemic has adversely affected our business and may continue to adversely affect our business until the pandemic is resolved.
  We have incurred significant losses since our inception and may continue to incur losses and thus may never achieve or maintain profitability.
  Our debt instruments and the Series E Certificate of Designation contain covenants that could limit our financing options and liquidity position, which would limit our ability to grow our business.
  The Jackson Note is secured by substantially all of our assets that are not secured by our revolving loan facility with Midcap Funding Trust and the terms of the Jackson Note may restrict our current and future operations. Additionally, Jackson may be able to exert significant influence over us as our senior secured and the beneficial owner of a substantial percentage of our outstanding shares of common stock.
 

Our common stock may be delisted from Nasdaq.

  We have significant working capital needs and if we are unable to satisfy those needs from cash generated from our operations or borrowings under our debt instruments, we may not be able to continue our operations.
  Our growth of operations could strain our resources and cause our business to suffer.
  Our strategy of growing through acquisitions may impact our business in unexpected ways.
  We face risks associated with litigation and claims.
  Our revenue may be adversely affected by fluctuations in currency exchange rates.
  We depend on attracting, integrating, managing, and retaining qualified personnel and temporary workers.
  Our revenue can vary because our customers can terminate their relationship with us at any time with limited or no penalty.
  If we are unable to retain existing customers or attract new customers, our results of operations could suffer.
  We operate in an intensely competitive and rapidly changing business environment, and there is a substantial risk that our services could become obsolete or uncompetitive.
  We could be adversely affected by risks associated with acquisitions and joint ventures.
  We are dependent upon technology services, and if we experience damage, service interruptions or failures in our computer and telecommunications systems, our customer relationships and our ability to attract new customers may be adversely affected.
  We could be harmed by improper disclosure or loss of sensitive or confidential company, employee, associate or customer data, including personal data.
  Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.
  We are subject to restrictions concerning our use of the proceeds of this offering.
  You will experience immediate and substantial dilution if you purchase securities in this offering.
  There is no established public trading market for the pre-funded warrants being offered in this offering.
 

Except as otherwise set forth in the pre-funded warrants, holders of pre-funded warrants purchased in this offering will have no rights as stockholders of common stock until such holders exercise their pre-funded warrants and acquire our common stock.

  Following this offering, we expect to seek stockholder approval to amend our Certificate of Incorporation to increase the number of authorized shares of common stock. An inability to secure requisite stockholder approval for such increase could materially and adversely impact our business and our ability to fund our operations.
  There may be future sales of our securities or other dilution of our equity, which may adversely affect the market price of our common stock.
  The price of our common stock has been, and may continue to be, volatile. This may affect the ability of our investors to sell their shares, and the value of an investment in our common shares may decline.
  We do not anticipate paying dividends on our common stock and, accordingly, stockholders must rely on stock appreciation for any return on their investment.
  Our operations may be affected by global economic fluctuations or events.
  The requirements of being a public company place significant demands on our resources.

 

Company Information

 

Staffing 360 Solutions, Inc., was incorporated in the State of Nevada on December 22, 2009, as Golden Fork Corporation, which changed its name to Staffing 360 Solutions, Inc., and its trading symbol to “STAF,” on March 16, 2012. On June 15, 2017, we changed our state of domicile to the State of Delaware. Our principal executive office is located at 641 Lexington Avenue, 27th Floor, New York, New York 10022, and our telephone number is (646) 507-5710. Our website is www.staffing360solutions.com, and the information included in, or linked to our website is not part of this prospectus. We have included our website address in this prospectus solely as a textual reference.

 

 

3

 

 

THE OFFERING

 

Common stock offered by us  

21,855,280 shares.

 

Pre-funded warrants offered by us

 

 

We are also offering to certain purchasers whose purchase of shares of common stock in this offering would otherwise result in the purchaser, together with its affiliates, beneficially owning more than 4.99% of our outstanding common stock immediately following the consummation of this offering, the opportunity to purchase, if such purchasers so choose, pre-funded warrants, in lieu of shares of common stock that would otherwise result in any such purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock. Each pre-funded warrant will be exercisable for one share of our common stock. The purchase price of each pre-funded warrant will equal the price per share at which the shares of common stock are being sold to the public in this offering, minus $0.0001, and the exercise price of each pre-funded warrant will be $0.0001 per share. The pre-funded warrants will be exercisable immediately and may be exercised at any time until all of the pre-funded warrants are exercised in full. This offering also relates to the shares of common stock issuable upon the exercise of any pre-funded warrants sold in this offering. For each pre-funded warrant we sell, the number of shares of common stock we are offering will be decreased on a one-for-one basis.

 

Common stock outstanding after this offering(1)  

39,246,528 shares (assuming the sale of the maximum number of shares of common stock offered this offering and no sale of pre-funded warrants).

 

Assumed public offering price   The assumed public offering price is $1.01 per share of common stock and $1.0099 per pre-funded warrant.
     
Use of proceeds  

Pursuant to the certificate of designation (the “Series E Certificate of Designation”) of our Base Series E Preferred Stock and Series E-1 Convertible Preferred Stock (“Series E-1 Preferred Stock,” and collectively with the Base Series E Preferred Stock, the “Series E Preferred Stock”), while our Series E Preferred Stock are outstanding, we are generally prohibited from using the proceeds from offerings of equity securities for any purpose other than redeeming our Series E Preferred Stock, subject to certain limited exceptions.

 

We received a waiver from Jackson, the sole holder of the outstanding shares of our Series E Preferred Stock, to use approximately (i) 75% of the net proceeds from this offering to redeem a portion of the Jackson Note, which currently has outstanding principal amount and accrued interest of $32,710,485 and (ii) 25% of the net proceeds from this offering to redeem a portion of our Base Series E Preferred Stock.

 

See “Use of Proceeds” on page 24.

 

 

4

 

 

Risk factors   See “Risk Factor Summary” above and “Risk Factors” beginning on page 6 of this prospectus for a discussion of factors you should consider carefully when making an investment decision.
     
Nasdaq symbol   Our common stock is listed on Nasdaq under the symbol “STAF.” There is no established trading market for the pre-funded warrants, and we do not expect a trading market to develop. We do not intend to list the pre-funded warrants on any securities exchange or other trading market. Without a trading market, the liquidity of the pre-funded warrants will be extremely limited.

 

(1) The number of shares of our common stock to be outstanding immediately after the closing of this offering is based on 17,391,248 shares of common stock outstanding as of February 4, 2021 and, unless otherwise indicated, excludes, as of that date:

 

  76,500 shares of common stock issuable upon exercise of stock options;
     
  10,690,000 shares of common stock issuable upon conversion of 10,690 shares of Base Series E Preferred Stock;
     
   1,407,000 shares of common stock issuable upon conversion of 1,407 shares of Series E-1 Preferred Stock issued as dividends to the holders of the Base Series E Preferred Stock;
     
   1,576,879 shares of common stock issuable upon the exercise of warrants outstanding prior to this offering at a weighted average exercise price of $0.99;
     
   up to 935,375 additional shares of common stock issuable upon conversion of shares of Series E-1 Preferred Stock issuable as dividends payable to the holders of our Base Series E Preferred Stock, based on 6,500 shares of preferred stock designated as Series E-1 Preferred Stock pursuant to the Series E Certificate of Designation;
     
  up to 21,855,280 shares of common stock issuable upon the exercise of the pre-funded warrants to be issued to investors in this offering an at exercise price of $0.0001 per share; and
     
  up to 1,639,146 shares of common stock issuable upon the exercise of warrants with an assumed exercise price of $1.2625 per share to be issued to the placement agent or its designees in connection with this offering.

 

Except as otherwise indicated, the information in this prospectus assumes (i) no sale of pre-funded warrants in this offering, which, if sold, would reduce the number of shares of common stock that we are offering on an one-for-one basis, (ii) no exercise of the warrants to be issued to the placement agent or its designees in connection with this offering, and (iii) no exercise of options or exercise of warrants and no conversion of any shares of preferred stock described above.

 

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RISK FACTORS

 

An investment in our securities involves a high degree of risk. Before deciding whether to invest in our securities, you should consider carefully the risks described below, together with other information in this prospectus and in any free writing prospectus that we have authorized for use in connection with this offering. Our business, financial condition, results of operations or cash flow could be seriously harmed as a result of these risks. This could cause the trading price of our common stock to decline, resulting in a loss of all or part of your investment. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business. Please also read carefully the section below entitled “Special Note Regarding Forward-Looking Statements.”

 

Risks Related to Our Business

 

The recent COVID-19 pandemic has adversely affected our business and may continue to adversely affect our business until the pandemic is resolved.

 

In December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, and has spread globally, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in affected countries. The COVID-19 pandemic is impacting worldwide economic activity, and activity in the United States and the United Kingdom where our operations are based. Much of the independent contractor work we provide to our clients is performed at the site of our clients. As a result, we are subject to the plans and approaches of our clients have made to address the COVID-19 pandemic, such as whether they support remote working or if they have simply closed their facilities and furloughed employees. To the extent that our clients were to decide or are required to close their facilities, or not permit remote work when they close facilities, we would no longer generate revenue and profit from that client. In addition, in the event that our clients’ businesses suffer or close as a result of the COVID-19 pandemic, we may experience decline in our revenue or write-off of receivables from such clients. Moreover, developments such as social distancing and shelter-in-place directives have impacted our ability to deploy our staffing workforce effectively, thereby impacting contracts with customers in our commercial staffing and professional staffing business streams, where we had declines in revenues during Q2 2020 and Q3 2020 and may have declines during Q4 2020 compared to the respective periods in 2019. While some government-imposed precautionary measures have been relaxed in certain countries or states, more strict measures have been or may be put in place again due to a resurgence in COVID-19 cases, as has occurred recently in the United Kingdom in response to the spread of a new strain of COVID-19. As a result of the newly imposed government restrictions in the United Kingdom, we had to close both of our offices in the United Kingdom and our employees have been forced to operate remotely from their homes. Therefore, the ongoing COVID-19 pandemic may continue to affect our operation and to disrupt the marketplace in which we operate and may negatively impact our sales in fiscal year 2021 and our overall liquidity.

 

While the ultimate economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others, the pandemic has resulted in significant disruptions in the general commercial activity and the global economy and caused financial market volatility and uncertainty in significant and unforeseen ways in the recent months. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital and on the market price of our common stock, and we may not be able to successfully raise needed capital. If we are unsuccessful in raising capital in the future, we may need to reduce activities, curtail or cease operations.

 

In addition, the continuation of the COVID-19 pandemic or an outbreak of other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations.

 

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Our common stock may be delisted from Nasdaq.

 

On June 3, 2020, we received a letter from the Listing Qualifications Department notifying us that we are no longer in compliance with the minimum stockholders’ equity requirement for continued listing on Nasdaq. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2,500,000. Further, as of June 9, 2020, we did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations.

 

In accordance with the Nasdaq Listing Rules, we were afforded the opportunity to submit a plan to regain compliance with the minimum stockholders’ equity standard. Based on our submissions, the Listing Qualifications Department granted us an extension to regain compliance with Rule 5550(b)(1) until November 30, 2020.

 

On December 1, 2020, we received notice that because we had not met the terms of the extension, our common stock would be subject to delisting from Nasdaq, unless we timely requested a hearing before the Panel. We timely requested a hearing before the Panel, which automatically stayed any suspension or delisting action pending the issuance of a decision by the Panel following the hearing and the expiration of any additional extension period granted by the Panel. The hearing occurred on January 21, 2021. At the hearing, we provided the Panel with an update on our compliance plan and requested a further extension of time in which to regain compliance. On February 3, 2021, we received a letter from the Panel noting it has granted our request for an extension until February 28, 2021 to regain compliance with the minimum $2.5 million stockholders’ equity requirement, or the alternative compliance standards as set forth in Nasdaq Listing Rule 5550(b)(1).

 

Although we are taking actions intended to restore our compliance with the listing requirements, we can provide no assurance that any action taken by us will be successful. Should a delisting occur, an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of our common stock, and our ability to raise future capital through the sale of our common stock could be severely limited. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities.

 

We have incurred significant losses since our inception and may continue to incur losses and thus may never achieve or maintain profitability.

 

We have incurred substantial losses since our inception, anticipate that we will continue to incur losses for the foreseeable future and may not achieve or sustain profitability. Because of the numerous risks and uncertainties associated with the staffing industry, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Expected future operating losses will have an adverse effect on our cash resources, stockholders’ equity and working capital. These factors individually and collectively raise a substantial doubt about or ability to continue as a going concern.

 

Our failure to become and remain profitable could depress the value of our common stock and impair our ability to raise capital, expand our business, maintain our development efforts, diversify our portfolio of staffing companies, or continue our operations. A decline in the value of our common stock could also cause you to lose all or part of your investment. For more detailed discussion of the risks related to the COVID-19 pandemic, please see “—The recent COVID-19 pandemic has adversely affected our business and may continue to adversely affect our business until the pandemic is resolved” above.

 

Our independent registered public accounting firm has included an explanatory paragraph in its report as of and for the year ended December 28, 2019 expressing substantial doubt in our ability to continue as a going concern based on our recurring and continuing losses from operations and our need for additional funding to continue operations and our susceptibility to economic downturns. Our consolidated financial statements do not include any adjustments that might result from the outcome of this going concern uncertainty and have been prepared under the assumption that we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we are unable to continue as a going concern, we may be forced to liquidate our assets which would have an adverse impact on our business and developmental activities. In such a scenario, the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The reaction of investors to the inclusion of a going concern statement by our independent registered public accounting firm and our potential inability to continue as a going concern may materially adversely affect our stock price and our ability to raise new capital or to enter into strategic alliances.

 

Our debt level could negatively impact our financial condition, results of operations and business prospects.

 

As of September 26, 2020, our total gross debt was approximately $57 million. Our level of debt could have significant consequences to our stockholders, including the following:

 

requiring the dedication of a substantial portion of cash flow from operations to make payments on debt, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities;
requiring a substantial portion of our corporate cash reserves to be held as a reserve for debt service, limiting our ability to invest in new growth opportunities;
limiting the ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate and other activities;
limiting the flexibility in planning for, or reacting to, changes in the business and industry in which we operate;
increasing our vulnerability to both general and industry-specific adverse economic conditions including the economic consequences of the COVID-19 pandemic;
putting us at a competitive disadvantage versus less leveraged competitors; and
increasing vulnerability to changes in the prevailing interest rates.

 

Our ability to make payments of principal and interest, or to refinance our indebtedness, depends on our future performance, which is subject to economic, financial, competitive and other factors. We had negative cash flows from operations for the nine months ended September 26, 2020, and we may not generate cash flow in the future sufficient to service our debt because of factors beyond our control, including but not limited to our ability to expand our operations. If we are unable to generate sufficient cash flows, we may be required to adopt one or more alternatives, such as restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. A default on our debt obligations could have a material adverse effect on our business, financial condition and results of operations and may cause you to lose all or part of your investment.

 

Further, the Jackson Note contains certain customary financial covenants, and we have had instances of non-compliance. Management has historically been able to obtain from Jackson waivers of any non-compliance and management expects to continue to be able to obtain necessary waivers in the event of future non-compliance; however, there can be no assurance that we will be able to obtain such waivers, and should Jackson refuse to provide a waiver in the future, the outstanding debt under the agreement could become due immediately. Our financing with MidCap Funding X Trust (“MidCap”) includes customary financial covenants and we have had instances of non-compliance. We have been able to obtain forbearance of any non-compliance from MidCap, and management expects to continue to be able to obtain necessary forbearance in the event of future non-compliance; however, there can be no assurance that the Company will be able to obtain such forbearance, and should MidCap refuse to provide a forbearance in the future, the outstanding debt under the agreement could become due immediately, which exceeds our current cash balance.

 

Our debt instruments and the Series E Certificate of Designation contain covenants that could limit our financing options and liquidity position, which would limit our ability to grow our business.

 

Covenants in our debt instruments and the Series E Certificate of Designations impose operating and financial restrictions on us. These restrictions prohibit or limit our ability to, among other things:

 

  pay cash dividends to our stockholders, subject to certain limited exceptions;
  redeem or repurchase our common stock or other equity;
  incur additional indebtedness;
  permit liens on assets;
  make certain investments (including through the acquisition of stock, shares, partnership or limited liability company interests, any loan, advance or capital contribution);
  sell, lease, license, lend or otherwise convey an interest in a material portion of our assets;
  cease making public filings under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and
  sell or otherwise issue shares of our common stock or other capital stock subject to certain limited exceptions.

 

Our failure to comply with the restrictions in our debt instruments and/or our Series E Certificate of Designations could result in events of default, which, if not cured or waived, could result in us being required to repay these borrowings before their due date or require us to redeem outstanding shares of Series E Preferred Stock. The holders of our debt and Series E Preferred Stock may require fees and expenses to be paid or other changes to terms in connection with waivers or amendments. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected by increased costs and rates.

 

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In addition, these restrictions may limit our ability to obtain additional financing, withstand downturns in our business or take advantage of business opportunities. In further addition, certain provisions of the Series E Certificate of Designations require us to use proceeds from any sales of our common stock to redeem shares of the Series E Preferred Stock, which could limit our ability to grow our business, acquire needed assets, or take other actions we might otherwise consider appropriate or desirable. See “—We are subject to restrictions concerning our use of the proceeds of this offering.”

 

The Jackson Note is secured by substantially all of our assets that are not secured by our revolving loan facility with Midcap and the terms of the Jackson Note may restrict our current and future operations. Additionally, Jackson may be able to exert significant influence over us as our senior secured and the beneficial owner of a substantial percentage of our outstanding shares of common stock.

 

The Jackson Note contains a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests. The Jackson Note includes covenants limiting or restricting, among other things, our ability to:

 

  incur or guarantee additional indebtedness;
  pay distributions on, redeem or repurchase shares of our capital stock or redeem or repurchase any of our subordinated debt;
  make certain investments;
  sell assets;
  enter into agreements that restrict distributions or other payments from our restricted subsidiaries;
  incur or allow the existence of liens;
  consolidate, merge or transfer all or substantially all of our assets; and
  engage in transactions with affiliates.

 

In addition, the Jackson Note contains financial covenants including, among other things, a fixed charge coverage ratio, minimum liquidity requirements and total leverage ratio. A breach of any of these financial covenants could result in a default under the Jackson Note. If any such default occurs, Jackson may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. In addition, following an event of default under the Jackson Note, Jackson will have the right to proceed against the collateral granted to it to secure the debt, which includes our available cash. If the debt under the Jackson Note was to be accelerated, we cannot assure you that our assets would be sufficient to repay in full our debt.

 

In addition to being our senior secured lender, as of the date of this prospectus, Jackson owns in excess of 10% of our outstanding shares of common stock, not including shares issuable upon the exercise of certain warrants and the conversion of Series E Preferred Stock. Jackson beneficially owns 49.6% of our common stock including shares issuable upon exercise of warrants and conversion of the Series E Preferred Stock as of the date of this prospectus, without giving effect to the waiver we received. Accordingly, Jackson may be able to exert significant influence over us.

 

We may not be entitled to forgiveness of our recently received Paycheck Protection Program Loan, and our application for the Paycheck Protection Program Loan could in the future be determined to have been impermissible or could result in damage to our reputation.

 

On May 12, 2020, Monroe Staffing, our indirect subsidiary, received loan proceeds of $10,000,000 pursuant to the Payment Protection Program (“PPP”) under the “Coronavirus Aid, Relief, and Economic Security (CARES) Act” administered by the Small Business Association (the “SBA”). In addition, on May 20, 2020, Key Resources Inc. (“KRI”), Lighthouse Placement Services, LLC (“LH”) and Staffing 360 Georgia, LLC (“SG”), each of which is our wholly owned direct or indirect subsidiary, received loan proceeds in the aggregate amount of $9,395,051 pursuant to the PPP (the “PPP Loans”). We and our subsidiaries used the PPP Loans in accordance with the requirements of the PPP to cover certain qualified expenses, including payroll costs, rent and utility costs. The PPP Loans are evidenced by promissory notes, dated as of May 12, 2020 and May 20, 2020, as applicable, issued by Newton Federal Bank, which contain customary events of default, including, among others, those relating to breaches of obligations under the PPP Loans, including a failure to make payments, any bankruptcy or similar proceedings, and certain material effects on our ability to repay the PPP Loans. The PPP Loans mature two years following the dates of issuance, bear interest at a rate of 1.00% per annum, and are subject to the standard terms and conditions applicable to loans administered by the SBA under the CARES Act.

 

Beginning on the tenth month following the issuance dates, we are required to make 14 monthly payments of principal and interest. The PPP Loans may be prepaid at any time prior to maturity. Under the CARES Act, as amended in June 2020, loan forgiveness is generally available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the 24-week period beginning on the dates of the first disbursement of the PPP Loans. The amount of the PPP Loans eligible to be forgiven may be reduced in certain circumstances, including as a result of certain headcount or salary reductions. In September, we applied for forgiveness of the PPP Loans in the aggregate amount equal to $19,395,051. As of the date of this prospectus, the PPP Loans have not been approved for forgiveness. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness or that any amount of the PPP Loans will ultimately be forgiven by the SBA.

 

In order to apply for the PPP Loans, we were required to certify, among other things, that the current economic uncertainty made the PPP Loans request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, the maintenance of our workforce, our need for additional funding to continue operations, and our ability to access alternative forms of capital in the current market environment to offset the effects of the COVID-19 pandemic. Following this analysis, we believe that we satisfied all eligibility criteria for the PPP Loans, and that our receipt of the PPP Loans is consistent with the broad objectives of the CARES Act. The certification described above did not contain any objective criteria and is subject to interpretation.

 

On April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the PPP has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that given our circumstances we satisfied all eligible requirements for the PPP Loans, we are later determined to have violated any applicable laws or regulations that may apply to us in connection with the PPP Loans or it is otherwise determined that we were ineligible to receive the PPP Loans, we may be required to repay the PPP Loans in their entirety and/or be subject to additional penalties, which could also result in adverse publicity and damage to our reputation. Should we be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgiveness of the PPP Loans or otherwise, such audit or review could result in the diversion of management’s time and attention and legal and reputational costs. If we were to be audited or reviewed and receive an adverse determination or finding in such audit or review, we could be required to return the full amount of the PPP Loans. Any of these events could have a material adverse effect on our business, results of operations and financial condition.

  

We have significant working capital needs and if we are unable to satisfy those needs from cash generated from our operations or borrowings under our debt instruments, we may not be able to continue our operations.

 

We require significant amounts of working capital to operate our business. We often have high receivables from our customers, and as a staffing company, we are prone to cash flow imbalances because we have to fund payroll payments to temporary workers before receiving payments from clients for our services. Cash flow imbalances also occur because we must pay temporary workers even when we have not been paid by our customers. If we experience a significant and sustained drop in operating profits, or if there are unanticipated reductions in cash inflows or increases in cash outlays, we may be subject to cash shortfalls. If such a shortfall were to occur for even a brief period of time, it may have a significant adverse effect on our business. In particular, we use working capital to pay expenses relating to our temporary workers and to satisfy our workers’ compensation liabilities. As a result, we must maintain sufficient cash availability to pay temporary workers and fund related tax liabilities prior to receiving payment from customers.

 

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In addition, our operating results tend to be unpredictable from quarter to quarter. Demand for our services is typically lower during traditional national vacation periods in the United States and United Kingdom when customers and candidates are on vacation. No single quarter is predictive of results of future periods. Any extended period of time with low operating results or cash flow imbalances could have a material adverse effect on our business, financial condition and results of operations.

 

We derive working capital for our operations through cash generated by our operating activities and borrowings under our debt instruments. If our working capital needs increase in the future, we may be forced to seek additional sources of capital, which may not be available on commercially reasonable terms. The amount we are entitled to borrow under our debt instruments is calculated monthly based on the aggregate value of certain eligible trade accounts receivable generated from our operations, which are affected by financial, business, economic and other factors, as well as by the daily timing of cash collections and cash outflows. The aggregate value of our eligible accounts receivable may not be adequate to allow for borrowings for other corporate purposes, such as capital expenditures or growth opportunities, which could reduce our ability to react to changes in the market or industry conditions.

 

Our growth of operations could strain our resources and cause our business to suffer.

 

We plan to continue growing our business organically through expansion, sales efforts, and strategic acquisitions, while maintaining tight controls on our expenses and overhead. Lean overhead functions combined with focused growth may place a strain on our management systems, infrastructure and resources, resulting in internal control failures, missed opportunities, and staff attrition which could impact our business and results of operations.

 

Our strategy of growing through acquisitions may impact our business in unexpected ways.

 

Our growth strategy involves acquisitions that help us expand our service offerings and diversify our geographic footprint. We continuously evaluate acquisition opportunities, but there are no assurances that we will be able to identify acquisition targets that complement our strategy and are available at valuation levels accretive to our business.

 

Even if we are successful in acquiring, our acquisitions may subject our business to risks that may impact our results of operation:

 

inability to integrate acquired companies effectively and realize anticipated synergies and benefits from the acquisitions;
diversion of management’s attention to the integration of the acquired businesses at the expense of delivering results for the legacy business;
inability to appropriately scale critical resources to support the business of the expanded enterprise and other unforeseen challenges of operating the acquired business as part of our operations;
inability to retain key employees of the acquired businesses and/or inability of such key employees to be effective as part of our operations;
impact of liabilities of the acquired businesses undiscovered or underestimated as part of the acquisition due diligence;
failure to realize anticipated growth opportunities from a combined business, because existing and potential clients may be unwilling to consolidate business with a single supplier or to stay with the acquirer post acquisition;
impacts of cash on hand and debt incurred to finance acquisitions, thus reducing liquidity for other significant strategic objectives; and
internal controls, disclosure controls, corruption prevention policies, human resources and other key policies and practices of the acquired companies may be inadequate or ineffective.

 

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We face risks associated with litigation and claims.

 

We are a party to certain legal proceedings as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Legal Proceedings.” In addition, from time to time, we may become involved in various claims, disputes and legal or regulatory proceedings that arise in the ordinary course of business and relate to contractual and other obligations. Due to the uncertainties of litigation, we can give no assurance that we will prevail on any claims made against us in any such lawsuit. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results. Adverse outcomes in some or all of these claims may result in significant monetary damages that could adversely affect our ability to conduct our business.

 

The uncertainty surrounding the implementation of Brexit may impact our UK operations.

 

The U.K. left the European Union January 31, 2020. Pursuant to the formal withdrawal arrangements agreed between the United Kingdom and the European Union, the United Kingdom withdrew from the European Union, effective December 31, 2020. On December 24, 2020, the United Kingdom and the European Union entered into a Trade and Cooperation Agreement. There may continue to be economic uncertainty surrounding the consequences of Brexit that could adversely impact customer confidence, resulting in customers reducing their spending budgets on our services. These and other adverse consequences such as reduced consumer spending, deterioration in economic conditions, loss of key international employees, volatility in exchange rates, and prohibitive laws and regulations could have a negative impact on our business, operating results and financial condition.

 

Our revenue may be adversely affected by fluctuations in currency exchange rates.

 

A significant portion of our expenditures are expected to be derived or spent in British pounds. However, we report our financial condition and results of operations in U.S. dollars. As a result, fluctuations between the U.S. dollar and the British pound will impact the amount of our revenues and net income. For example, if the British pound appreciates relative to the U.S. dollar, the fluctuation will result in a positive impact on the revenues that we report. However, if the British pound depreciates relative to the U.S. dollar, which was the case during 2016 and in 2020, there will be a negative impact on the revenues we report due to such fluctuation. It is possible that the impact of currency fluctuations will result in a decrease in reported consolidated sales even though we may have experienced an increase in sales transacted in the British pound. Conversely, the impact of currency fluctuations may result in an increase in reported consolidated sales despite declining sales transacted in the British pound. The exchange rate from the U.S. dollar to the British pound has fluctuated substantially in the past and may continue to do so in the future. Though we may choose to hedge our exposure to foreign currency exchange rate changes in the future, there is no guarantee such hedging, if undertaken, will be successful.

 

We depend on attracting, integrating, managing, and retaining qualified personnel.

 

Our success is substantially dependent upon our ability to attract, integrate, manage and retain personnel who possess the skills and experience necessary to fulfill our customers’ needs. Our ability to hire and retain qualified personnel could be impaired by any diminution of our reputation, decrease in compensation levels relative to our competitors or modifications to our total compensation philosophy or competitor hiring programs. If we cannot attract, hire and retain qualified personnel, our business, financial condition and results of operations may suffer. Our future success also depends upon our ability to manage the performance of our personnel. Failure to successfully manage the performance of our personnel could affect our profitability by causing operating inefficiencies that could increase operating expenses and reduce operating income.

 

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We depend on our ability to attract and retain qualified temporary workers.

 

In addition to the members of our own team, our success is substantially dependent on our ability to recruit and retain qualified temporary workers who possess the skills and experience necessary to meet the staffing requirements of our customers. We are required to continually evaluate our base of available qualified personnel to keep pace with changing customer needs. Competition for individuals with proven professional skills is intense, and demand for these individuals is expected to remain strong for the foreseeable future. There can be no assurance that qualified personnel will continue to be available.

 

Our revenue can vary because our customers can terminate their relationship with us at any time with limited or no penalty.

 

We focus on providing mid-level professional and light industrial personnel on a temporary assignment-by-assignment basis, which customers can generally terminate at any time or reduce their level of use when compared to prior periods. To avoid large placement agency fees, large companies may use in-house personnel staff, current employee referrals, or human resources consulting companies to find and hire new personnel. Because placement agencies typically charge a fee based on a percentage of the first year’s salary of a new worker, companies with many jobs to fill have a large financial incentive to avoid agencies.

 

Our business is also significantly affected by our customers’ hiring needs and their views of their future prospects. Our customers may, on very short notice, terminate, reduce or postpone their recruiting assignments with us and, therefore, affect demand for our services. As a result, a significant number of our customers can terminate their agreements with us at any time, making us particularly vulnerable to a significant decrease in revenue within a short period of time that could be difficult to quickly replace. This could have a material adverse effect on our business, financial condition and results of operations.

 

Most of our contracts do not obligate our customers to utilize a significant amount of our staffing services and may be cancelled on limited notice, so our revenue is not guaranteed.

 

Substantially all of our revenue is derived from multi-year contracts that are terminable for convenience. Under our multi-year agreements, we contract to provide customers with staffing services through work or service orders at the customers’ request. Under these agreements, our customers often have little or no obligation to request our staffing services. In addition, most of our contracts are cancellable on limited notice, even if we are not in default under the contract. We may hire employees permanently to meet anticipated demand for services under these agreements that may ultimately be delayed or cancelled. We could face a significant decline in revenues and our business, financial condition or results of operations could be materially adversely affected if:

 

  we see a significant decline in the staffing services requested from us under our service agreements; or
  our customers cancel or defer a significant number of staffing requests; or our existing customer agreements expire or lapse and we cannot replace them with similar agreements

 

If we are unable to retain existing customers or attract new customers, our results of operations could suffer.

 

Increasing the growth and profitability of our business is particularly dependent upon our ability to retain existing customers and capture additional customers. Our ability to do so is dependent upon our ability to provide high quality services and offer competitive prices. If we are unable to execute these tasks effectively, we may not be able to attract a significant number of new customers and our existing customer base could decrease, either or both of which could have an adverse impact on our revenues.

 

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We operate in an intensely competitive and rapidly changing business environment, and there is a substantial risk that our services could become obsolete or uncompetitive.

 

The markets for our services are highly competitive. Our markets are characterized by pressures to provide high levels of service, incorporate new capabilities and technologies, accelerate job completion schedules and reduce prices. Furthermore, we face competition from a number of sources, including other executive search firms and professional search, staffing and consulting firms. Several of our competitors have greater financial and marketing resources than we do. New and existing competitors are aided by technology, and the market has low barriers to entry. Furthermore, Internet employment sites expand a company’s ability to find workers without the help of traditional agencies. Personnel agencies often work as intermediaries, helping employers accurately describe job openings and screen candidates. Increasing the use of sophisticated, automated job description and candidate screening tools could make many traditional functions of staffing companies obsolete. Specifically, the increased use of the internet may attract technology-oriented companies to the professional staffing industry. Free social networking sites such as LinkedIn and Facebook are also becoming a common way for recruiters and employees to connect without the assistance of a staffing company.

 

Our future success will depend largely upon our ability to anticipate and keep pace with those developments and advances. Current or future competitors could develop alternative capabilities and technologies that are more effective, easier to use or more economical than our services. In addition, we believe that, with continuing development and increased availability of information technology, the industries in which we compete may attract new competitors. If our capabilities and technologies become obsolete or uncompetitive, our related sales and revenue would decrease. Due to competition, we may experience reduced margins on our services, loss of market share, and loss of customers. If we are not able to compete effectively with current or future competitors as a result of these and other factors, our business, financial condition and results of operations could be materially adversely affected.

 

We could be adversely affected by risks associated with acquisitions and joint ventures.

 

We are engaged in the acquisition of U.S. and U.K. based staffing companies, and our typical acquisition model is based on paying consideration in the form of cash, stock, earn-outs and/or promissory notes. To date, we have completed ten acquisitions. We intend to expand our business through acquisitions of complementary businesses, services or products, subject to our business plans and management’s ability to identify, acquire and develop suitable investments or acquisition targets in both new and existing service categories. In certain circumstances, acceptable investments or acquisition targets might not be available. Acquisitions involve a number of risks, including:

 

difficulty in integrating the operations, technologies, products and personnel of an acquired business, including consolidating redundant facilities and infrastructure;
potential disruption of our ongoing business and the distraction of management from our day-to-day operations;
difficulty entering markets in which we have limited or no prior experience and in which competitors have a stronger market position;
difficulty maintaining the quality of services that such acquired companies have historically provided; potential legal and financial responsibility for liabilities of acquired businesses;
overpayment for the acquired company or assets or failure to achieve anticipated benefits, such as cost savings and revenue enhancements;
increased expenses associated with completing an acquisition and amortizing any acquired intangible assets;
challenges in implementing uniform standards, accounting policies, customs, controls, procedures and policies throughout an acquired business;
failure to retain, motivate and integrate key management and other employees of the acquired business; and
loss of customers and a failure to integrate customer bases.

 

Our business plan for continued growth through acquisitions is subject to certain inherent risks, including accessing capital resources, potential cost overruns and possible rejection of our business model and/or sales methods. Therefore, we provide no assurance that we will be successful in carrying out our business plan. We continue to pursue additional debt and equity financing to fund our business plan. We have no assurance that future financing will be available to us on acceptable terms or at all.

 

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In addition, if we incur indebtedness to finance an acquisition, it may reduce our capacity to borrow additional amounts and require us to dedicate a greater percentage of our cash flow from operations to payments on our debt, thereby reducing the cash resources available to us to fund capital expenditures, pursue other acquisitions or investments in new business initiatives and meet general corporate and working capital needs. This increased indebtedness may also limit our flexibility in planning for, and reacting to, changes in or challenges relating to our business and industry. The use of our common stock or other securities (including those convertible into or exchangeable or exercisable for our common stock) to finance any such acquisition may also result in dilution of our existing shareholders.

 

The potential risks associated with future acquisitions could disrupt our ongoing business, result in the loss of key customers or personnel, increase expenses and otherwise have a material adverse effect on our business, results of operations and financial condition.

 

We are dependent upon technology services, and if we experience damage, service interruptions or failures in our computer and telecommunications systems, our customer relationships and our ability to attract new customers may be adversely affected.

 

Our business could be interrupted by damage to or disruption of our computer and telecommunications equipment and software systems, and we may lose data. Our customers’ businesses may be adversely affected by any system or equipment failure we experience. As a result of any of the foregoing, our relationships with our customers may be impaired, we may lose customers, our ability to attract new customers may be adversely affected and we could be exposed to contractual liability. Precautions in place to protect us from, or minimize the effect of, such events may not be adequate. If an interruption by damage to or disruption of our computer and telecommunications equipment and software systems occurs, we could be liable and the market perception of our services could be harmed.

 

We could be harmed by improper disclosure or loss of sensitive or confidential company, employee, associate or customer data, including personal data.

 

In connection with the operation of our business, we store, process and transmit a large amount of data, including personnel and payment information, about our employees, customers, associates and candidates, a portion of which is confidential and/or personally sensitive. In doing so, we rely on our own technology and systems, and those of third-party vendors we use for a variety of processes. We and our third-party vendors have established policies and procedures to help protect the security and privacy of this information. Unauthorized disclosure or loss of sensitive or confidential data may occur through a variety of methods. These include, but are not limited to, systems failure, employee negligence, fraud or misappropriation, or unauthorized access to or through our information systems, whether by our employees or third parties, including a cyberattack by computer programmers, hackers, members of organized crime and/or state-sponsored organizations, who may develop and deploy viruses, worms or other malicious software programs.

 

Such disclosure, loss or breach could harm our reputation and subject us to government sanctions and liability under our contracts and laws that protect sensitive or personal data and confidential information, resulting in increased costs or loss of revenues. It is possible that security controls over sensitive or confidential data and other practices we and our third-party vendors follow may not prevent the improper access to, disclosure of, or loss of such information. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions in which we provide services. Any failure or perceived failure to successfully manage the collection, use, disclosure, or security of personal information or other privacy related matters, or any failure to comply with changing regulatory requirements in this area, could result in legal liability or impairment to our reputation in the marketplace.

 

13

 

 

We have been and may be exposed to employment-related claims and losses, including class action lawsuits, which could have a material adverse effect on our business.

 

We employ people internally and in the workplaces of other businesses. Many of these individuals have access to customer information systems and confidential information. The risks of these activities include possible claims relating to:

 

  discrimination and harassment;
  wrongful termination or denial of employment;
  violations of employment rights related to employment screening or privacy issues;
  classification of temporary workers;
  assignment of illegal aliens;
  violations of wage and hour requirements;
  retroactive entitlement to temporary worker benefits;
  errors and omissions by our temporary workers;
  misuse of customer proprietary information;
  misappropriation of funds;
  damage to customer facilities due to negligence of temporary workers; and
  criminal activity.

 

We may incur fines and other losses or negative publicity with respect to these problems. In addition, these claims may give rise to litigation, which could be time-consuming and expensive. New employment and labor laws and regulations may be proposed or adopted that may increase the potential exposure of employers to employment-related claims and litigation. There can be no assurance that the corporate policies we have in place to help reduce our exposure to these risks will be effective or that we will not experience losses as a result of these risks. There can also be no assurance that the insurance policies we have purchased to insure against certain risks will be adequate or that insurance coverage will remain available on reasonable terms or be sufficient in amount or scope of coverage.

 

14

 

 

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our amended and restated certificate of incorporation, as amended (the “Certificate of Incorporation”) and our amended and restated bylaws (the “Bylaws”) may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors (the “Board”). Because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include that:

 

  our Board has the exclusive right to expand the size of our Board and to elect directors to fill a vacancy created by the expansion of the Board or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board;
  a special meeting of stockholders may be called only by a majority of the Board, the executive chairman or the president, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
  our stockholders do not have the right to cumulate votes in the election of directors, which limits the ability of minority stockholders to elect director candidates;
  our Board may alter our Bylaws without obtaining stockholder approval;
  stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the Board or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company; and
  our Board is authorized to issue shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror.

 

In addition, our debt agreement with Jackson limits our ability to consolidate, merge, or transfer all or substantially all of our assets or to effect a change in control of ownership of our company. A breach of such restrictions could result in a default under our debt agreement, under which Jackson may elect to declare all outstanding borrowings under the debt agreement, together with accrued interest and other amounts payable thereunder, to be immediately due and payable.

 

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

Furthermore, our Certificate of Incorporation specifies that, unless we consent in writing to the selection of an alternative forum, a state court located within the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders, which may include federal claims and derivative actions, except that if no state court located within the State of Delaware has jurisdiction over such claims (including subject matter jurisdiction), the sole and exclusive forum for such claim shall be the federal district court for the District of Delaware. We believe these provisions may benefit us by providing increased consistency in the application of Delaware law and federal securities laws by chancellors and judges, as applicable, particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, these provisions may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in the Certificate of Incorporation to be inapplicable or unenforceable in such action. Specifically, the choice of forum provision in requiring that the state courts of the State of Delaware be the exclusive forum for certain suits would (i) not be enforceable with respect to any suits brought to enforce any liability or duty created by the Exchange Act and (ii) have uncertain enforceability with respect to claims under the Securities Act of 1933, as amended (the “Securities Act”). The choice of forum provision in the Certificate of Incorporation does not have the effect of causing our stockholders to have waived our obligation to comply with the federal securities laws and the rules and regulations thereunder.

 

15

 

 

Risks Related to Our Common Stock and this Offering

 

We are subject to restrictions concerning our use of the proceeds of this offering.

 

Pursuant to the Series E Certificate of Designation, while our Series E Preferred Stock is outstanding, we are required to use the proceeds of any sales of equity securities, including the securities offered hereby, exclusively to redeem any outstanding shares of Series E Preferred Stock. Accordingly, without obtaining a waiver from the requisite holders of the Series E Preferred Stock, any proceeds from this offering or future equity offerings must be used to redeem the Series E Preferred Stock.

 

We received a waiver from Jackson, the sole holder of our outstanding shares of Series E Preferred Stock to use the proceeds from this offering to redeem approximately (i) 75% of the net proceeds from this offering to redeem a portion of the Jackson Note, which currently has outstanding principal amount and accrued interest of $32,710,485 and (ii) 25% of the net proceeds from this offering to redeem a portion of our Base Series E Preferred Stock. You will not have the opportunity, as part of your investment decision, to direct the use of the net proceeds. It is possible that the net proceeds will be used in a way that does not yield a favorable, or any, return for us. The failure to use such funds effectively could have a material adverse effect on our business, financial condition, operating results and cash flow.

 

You will experience immediate and substantial dilution if you purchase securities in this offering.

 

As of September 26, 2020, our net tangible book value was approximately $(57,800,000), or $(6.192) per share. Since the assumed public offering price per share of our common stock being offered in this offering is substantially higher than the net tangible book value per share of our common stock, you will suffer substantial dilution with respect to the net tangible book value of the common stock you purchase in this offering. Based on the assumed public offering price per share of common stock being sold in this offering of $1.01 (the last reported sale price of our common stock on Nasdaq on February 4, 2021), and our net tangible book value per share as of September 26, 2020, if you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of $2.032 per share with respect to the net tangible book value of the common stock. See the section entitled “Dilution” for a more detailed discussion of the dilution you will incur if you purchase common stock in this offering.

 

There is no established public trading market for the pre-funded warrants being offered in this offering.

 

There is no established public trading market for the pre-funded warrants being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply to list the pre-funded warrants on any national securities exchange or other nationally recognized trading system, including Nasdaq. Without an active market, the liquidity of the pre-funded warrants will be limited.

 

Except as otherwise provided in the pre-funded warrants, holders of pre-funded warrants purchased in this offering will have no rights as stockholders of common stock until such holders exercise their pre-funded warrants and acquire our common stock.

 

Except as otherwise provided in the pre-funded warrants, until holders of pre-funded warrants acquire our common stock upon exercise of the pre-funded warrants, holders of pre-funded warrants will have no rights with respect to our common stock underlying such pre-funded warrants. Upon exercise of the pre-funded warrants, the holders will be entitled to exercise the rights of a stockholder of our common stock only as to matters for which the record date occurs after the exercise date.

 

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Following this offering, we expect to seek stockholder approval to amend our Certificate of Incorporation to increase the number of authorized shares of common stock. An inability to secure requisite stockholder approval for such increase could materially and adversely impact our business and our ability to fund our operations.

 

We have authorized 40,000,000 shares of common stock. As of February 4, 2021, we had 17,391,248 outstanding shares of common stock. In addition, as of that date, we had outstanding warrants to purchase 1,576,879 shares of common stock and options to purchase 76,500 shares of common stock. In addition, 10,690,000 shares of common stock were issuable upon conversion of 10,690 shares of Base Series E Preferred Stock, and 1,407,000 shares of common stock were issuable upon conversion of 1,407 shares of Series E-1 Preferred Stock. Additionally, a dividend payable in shares of Series E-1 Preferred Stock will accrue at a rate of 5% per year of the liquidation value of the outstanding Base Series E Preferred Stock while the Base Series E Preferred Stock remains outstanding. Shares of Series E-1 Preferred Stock issuable in the future, based on 10,690 shares of Base Series E Preferred Stock outstanding as of February 4, 2021, will be convertible into 935,375 shares of common stock.

 

We received a waiver from Jackson, the sole holder of our outstanding shares of Series E Preferred Stock, to limit the conversion of the outstanding shares of Base Series E Preferred Stock and Series E-1 Preferred Stock into common stock or the exercise of any warrants to purchase our common stock to the extent that doing so would exceed the number of our authorized shares of common stock to be less than the number of shares being offered pursuant to this prospectus, until April 6, 2021. As of February 4, 2021, without giving effect to such agreement not to exercise or convert, 13,002,508 shares of common stock were issuable upon the conversion of the preferred stock and the exercise of warrants owned by Jackson. Under the terms of the waiver, we agreed to take all actions necessary to cause a meeting of stockholders to be held as soon as is reasonably possible and to present at such meeting a proposal to increase the number of authorized shares of common stock to at least a total of 100,000,000 shares, and to use our reasonable best efforts to solicit votes of our stockholders in favor of such proposal. In the event we may fail to secure the requisite stockholder approval for the increase in the number of authorized shares of common stock, it will result in an event of default under our Second Amended and Restated Note Purchase Agreement, dated as of October 26, 2020 (the “Amended Note Purchase Agreement”), the Series E Certificate of Designation, and the amended and restated warrant agreement, dated as of April 25, 2018, as amended, with Jackson and, consequently, our financial conditions and operations. In addition, following this offering, we will be limited by the number of additional shares available for future capital raising transactions or strategic transactions unless we obtain stockholder approval to amend our Certificate of Incorporation to increase the number of authorized shares of common stock. This may cause a delay in our future capital raising or other strategic transactions and may have a material adverse effect on our business and financial condition.

  

Future sales of our common stock may cause the prevailing market price of our shares to decrease.

 

The issuance of shares of common stock upon the exercise of warrants or options or conversion of preferred stock would dilute the percentage ownership interest of all stockholders, might dilute the book value per share of our common stock and would increase the number of our publicly traded shares, which could depress the market price of our common stock. The perceived risk of dilution as a result of the significant number of outstanding warrants, options and shares of convertible preferred stock may cause our common stockholders to be more inclined to sell their shares, which would contribute to a downward movement in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our common stock price could encourage investors to engage in short sales of our common stock, which could further contribute to price declines in our common stock. The fact that our stockholders, warrant holders and option holders can sell substantial amounts of our common stock in the public market, whether or not sales have occurred or are occurring, could make it more difficult for us to raise additional funds through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate, or at all.

 

There may be future sales of our securities or other dilution of our equity, which may adversely affect the market price of our common stock. 

 

We are generally not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock, subject us using the proceeds from such sale to redeem shares of Series E Preferred Stock. The market price of our common stock could decline as a result of sales of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock after this offering or the perception that such sales could occur. 

 

17

 

 

Even if this offering is successful, we may need to raise additional capital in the future to finance our operations, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.

 

We have had recurring losses from operations, negative operating cash flow and have an accumulated deficit. We must raise additional funds in order to continue financing our operations. If additional capital is not available to us when needed or on acceptable terms, we may not be able to continue to operate our business pursuant to our business plan or we may have to discontinue our operations entirely. Any additional capital raised through the sale of equity or equity-backed securities may dilute our stockholders’ ownership percentages and could also result in a decrease in the market value of our equity securities. The terms of any securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then outstanding.

 

If we are unable to secure additional funds when needed or on acceptable terms, we may be required to defer, reduce or eliminate significant planned expenditures, restructure, curtail or eliminate some or all of our operations, dispose of technology or assets, pursue an acquisition of our company by a third party at a price that may result in a loss on investment for our stockholders, file for bankruptcy or cease operations altogether. Any of these events could have a material adverse effect on our business, financial condition and results of operations. Moreover, if we are unable to obtain additional funds on a timely basis, there will be substantial doubt about our ability to continue as a going concern and increased risk of insolvency and up to a total loss of investment by our stockholders.

 

18

 

 

A low trading price could lead the Nasdaq Stock Market to take actions toward delisting our common stock, including immediately delisting of our common stock.

 

On September 24, 2020, we received a letter from the Listing Qualifications Department indicating that, based upon the closing bid price of our common stock for the 30 consecutive business day period between August 12, 2020 through September 23, 2020, we did not meet the minimum bid price of $1.00 per share required for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2).

 

Although on November 12, 2020, we received a written notice from the Listing Qualifications Department informing us that we have regained compliance with Rule 5550(a)(2), if we are again determined to be below the minimum closing bid price requirement, the Listing Qualifications Department will then take the appropriate action, which depending on the circumstances, may include delisting proceedings. The closing price of our common stock for each trading day in January 2021 was below $1.00. There can be no assurance that the market price of our common stock will remain above the levels viewed as abnormally low for a substantial period of time. In any event, other factors unrelated to the number of shares of our common stock outstanding, such as negative financial or operational results, could adversely affect the market price of our common stock to fall below the levels viewed as low selling price for a substantial period of time and may be delisted from trading on the Nasdaq.

 

The price of our common stock has been, and may continue to be, volatile. This may affect the ability of our investors to sell their shares, and the value of an investment in our common shares may decline.

 

Historically, the market price of our common stock has fluctuated over a wide range. During the 12-month period ended February 4, 2021, our common stock traded as high as $3.34 per share and as low as $0.28 per share. The market prices of our common stock may continue to be volatile and could fluctuate widely in response to various factors, many of which are beyond our control, including the following:

 

  our quarterly or annual operating results;
  changes in our earnings estimates;
  investment recommendations by securities analysts following our business or our industry;
  additions or departures of key personnel;
  negative outcome of pending and future claims and litigation;
  changes in the business, earnings estimates or market perceptions of our competitors;
  our failure to achieve operating results consistent with securities analysts’ projections;
  changes in industry, general market or economic conditions, including levels of capital spending by customers in the industries we serve; and
  announcements of legislative or regulatory changes.

 

Furthermore, the stock market in general has experienced extreme price fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies, including companies in the staffing industry. The changes often appear to occur without regard to specific operating performance. The price of our common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially reduce our stock price. Furthermore, the COVID-19 pandemic has resulted in significant financial market volatility and uncertainty in recent months. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital and on the market price of our common stock.

 

There has been a limited trading market for our common stock in the past, and we cannot ensure that an active trading market for our common stock can be sustained.

 

Historically, there has been relatively limited trading volume in the market for our common stock in the past, and the market for our common stock was illiquid. Although the trading volume of our common stock has increased in the recent months, a more active and sustained, liquid public trading market may not develop. Limited liquidity in the trading market for our common stock may adversely affect a stockholder’s ability to sell its shares of common stock at the time it wishes to sell them or at a price that it considers acceptable. If an active trading market for our common stock is not sustained, we may be limited in our ability to raise capital by selling shares of common stock and our ability to acquire other companies or assets by using shares of our common stock as consideration. In addition, if there is a thin trading market or “float” for our stock, the market price for our common stock may fluctuate significantly more than the stock market as a whole. Without a large float, our common stock would be less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile and it would be harder for a stockholder to liquidate any investment in our common stock.

 

19

 

 

We do not anticipate paying dividends on our common stock and, accordingly, stockholders must rely on stock appreciation for any return on their investment.

 

We paid a quarterly cash dividend of $0.01 per share to holders of our common stock on February 28, 2019 and May 30, 2019. We are limited in our ability to pay dividends by certain of our existing debt agreements and the certificate of designations of our Series E Preferred Stock. In particular, the Amended Note Purchase Agreement, with Jackson prohibits payment of dividends on our common stock in cash. In addition, our Series E Certificate of Designation only permits us to pay a quarterly cash dividend of one cent per share of issued and outstanding common stock; provided, that such cash dividend does not exceed $100,000 in the aggregate per fiscal quarter. We may not pay such dividends if any events of default exist under our debt agreements or the Series E Certificate of Designation.

 

Accordingly, we do not expect to pay or declare any further cash dividends on our common stock for the foreseeable future. We expect to retain our future earnings, if any, for use in the operation of our business, including the repayment of our outstanding indebtedness. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the primary way to realize any gains on their investment.

 

Upon our dissolution, you may not recoup all or any portion of your investment.

 

In the event of a liquidation, dissolution or winding-up of our company, whether voluntary or involuntary, the proceeds and/or assets of our company remaining after giving effect to such transaction, and the payment of all of our debts and liabilities will be distributed to the stockholders of common stock on a pro rata basis. There can be no assurance that we will have available assets to pay to the holders of common stock, or any amounts, upon such a liquidation, dissolution or winding-up of our company. In this event, you could lose some or all of your investment.

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Generic Risk Factors

 

We may be unable to develop, implement and maintain appropriate internal controls over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results and current and potential stockholders may lose confidence in our financial reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, and the Sarbanes-Oxley Act of 2002 and the SEC rules require that our management report annually on the effectiveness of our internal control over financial reporting and our disclosure controls and procedures. Among other things, our management must conduct an assessment of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002.

 

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. In the past, we identified material weaknesses in our internal control over financial reporting relating to the accounting for complex debt and equity instruments. While we believe that we have remediated this material weakness, we cannot assure you that additional material weaknesses will not be identified in the future.

 

Any failure to implement or maintain required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, or could result in material misstatements in our consolidated financial statements. These misstatements could result in a restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations, reduce our ability to obtain financing or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

 

There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.

 

The ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 require us to identify material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Our management, including our Chief Executive Officer and Principal Financial Officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the Company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

21

 

 

In addition, discovery and disclosure of a material weakness, could have a material adverse impact on our financial statements. Such an occurrence could discourage certain customers or suppliers from doing business with us, cause downgrades in our future debt ratings leading to higher borrowing costs and affect how our stock trades. This could, in turn, negatively affect our ability to access public debt or equity markets for capital.

 

Our operations may be affected by global economic fluctuations.

 

Customers’ demand for our services may fluctuate widely with changes in economic conditions in the markets in which we operate. Those conditions include slower employment growth or reductions in employment, which directly impact our service offerings. As a staffing company, our revenue depends on the number of jobs we fill, which in turn depends on economic growth. During economic slowdowns, many customer companies stop hiring altogether. For example, in prior economic downturns, many employers in our operating regions reduced their overall workforce to reflect the slowing demand for their products and services. We may face lower demand and increased pricing pressures during these periods, which this could have a material adverse effect on our business, financial condition and results of operations.

 

Our business may be impacted by political events, war, terrorism, public health issues, natural disasters and other business interruptions.

 

War, terrorism, geopolitical uncertainties, public health issues (such as COVID-19) and other business interruptions have caused and could cause damage or disruption to commerce and the economy, and thus could have a material adverse effect on us and our customers. Our business operations are subject to interruption by, among others, natural disasters, whether as a result of climate change or otherwise, fire, power shortages, nuclear power plant accidents and other industrial accidents, terrorist attacks and other hostile acts, labor disputes, public health issues and other events beyond our control. Such events could decrease demand for our services.

 

Our compliance with complicated regulations concerning corporate governance and public disclosure has resulted in additional expenses.

 

We are faced with expensive, complicated and evolving disclosure, governance and compliance laws, regulations and standards relating to corporate governance and public disclosure. In addition, as a staffing company, we are regulated by the U.S. Department of Labor, the Equal Employment Opportunity Commission, and often by state authorities. New or changing laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing compliance work.

 

Our failure to comply with all laws, rules and regulations applicable to U.S. public companies could subject us or our management to regulatory scrutiny or sanction, which could harm our reputation and stock price. Our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

 

The requirements of being a public company place significant demands on our resources.

 

As a public company, we incur significant legal, accounting, and other expenses. In addition, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules subsequently implemented by the SEC and Nasdaq, have imposed various requirements on public companies. New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, and changes in required accounting practices and rules adopted by the SEC and Nasdaq, would likely result in increased costs to us as we respond to their requirements.

 

Shareholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and will make some activities more time consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain and maintain director and officer liability insurance and we may be required to incur substantial costs to maintain our current levels of such coverage.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus may include “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Our use of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal” or the negative of those words or other similar expressions is intended to identify forward-looking statements that represent our current judgment about possible future events. Forward-looking statements should not be read as a guarantee of future performance or results and will probably not be accurate indications of when such performance or results will be achieved. All statements included in this prospectus and in related comments by our management, other than statements of historical facts, including without limitation, statements about future events or financial performance, are forward-looking statements that involve certain risks and uncertainties.

 

These statements are based on certain assumptions and analyses made in light of our experience and perception of historical trends, current conditions and expected future developments as well as other factors that we believe are appropriate in the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. Whether actual future results and developments will conform with our expectations and predictions is subject to a number of risks and uncertainties, including the risks and uncertainties discussed in this prospectus under the captions “Risk Factors.”

 

Consequently, all of the forward-looking statements made in this prospectus are qualified by these cautionary statements and there can be no assurance that the actual results or developments that we anticipate will be realized or, even if realized, that they will have the expected consequences to or effects on us and our subsidiaries or our businesses or operations. We caution investors not to place undue reliance on forward-looking statements. We undertake no obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, future events, or other such factors that affect the subject of these statements, except where we are expressly required to do so by law.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $20.2 million from the sale of the securities offered by us in this offering, based on the sale of the maximum amount of 21,855,280 shares of common stock at an assumed public offering price of $1.01 per share (the last reported sale price of our common stock on Nasdaq on February 4, 2021) and assuming no sale of any pre-funded warrants in this offering, after deducting the placement agent fees and estimated offering expenses payable by us. However, this is a best efforts offering with no minimum, and we may not sell all or any of the securities we are offering. As a result, we may receive significantly less in net proceeds.

 

A $0.10 increase (decrease) in the assumed public offering price of $1.01 per share would increase (decrease) the expected net proceeds to us from this offering by approximately $2.0 million, assuming the maximum number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the placement agent fees and estimated offering expenses payable by us and excluding the proceeds, if any, from the exercise of the pre-funded warrants issued pursuant to this offering.

 

Similarly, a 100,000 share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by approximately $93,000, assuming the assumed public offering price of $1.01 per share remains the same, and after deducting placement agent fees and estimated offering expenses payable by us and excluding the proceeds, if any, from the exercise of the pre-funded warrants issued pursuant to this offering.

 

While our Series E Preferred Stock is outstanding, we are required to use the proceeds of any sales of equity securities, including the securities offered hereby, exclusively to redeem any outstanding shares of Series E Preferred Stock, subject to certain limitations. We received a waiver from Jackson, the sole holder of our outstanding shares of Series E Preferred Stock, to use the proceeds from this offering to redeem approximately (i) 75% of the net proceeds from this offering to redeem a portion of the Jackson Note, which currently has an outstanding principal amount and accrued interest of $32,710,485 and (ii) 25% of the net proceeds from this offering to redeem a portion of our Base Series E Preferred Stock. We have 1,407 shares of Base Series E Preferred Stock currently outstanding with an aggregate stated value of $1,407,000 in accordance with the Series E Certificate of Designation.

 

Pending application of the net proceeds as described above, we intend to invest the net proceeds to us from this offering in a variety of capital preservation investments, including short-term, investment-grade and interest-bearing instruments.

 

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DIVIDEND POLICY

 

We paid a quarterly cash dividend of $0.01 per share to holders of our common stock on February 28, 2019 and May 30, 2019. However, as discussed below, we do not expect to pay or declare any further cash dividends on our common stock for the foreseeable future.

 

We are limited in our ability to pay dividends by certain of our existing agreements and the certificates of designations of our preferred stock. In particular, our Amended Note Purchase Agreement with Jackson prohibits payment of dividends on our common stock in cash. In addition, our Series E Certificate of Designation only permits us to pay a quarterly cash dividend of one cent per share of issued and outstanding common stock; provided, that such cash dividend does not exceed $100,000 in the aggregate per fiscal quarter. We may not pay such dividends if any events of default exist under our debt agreements or the Series E Certificate of Designation.

 

In addition, our ability to issue dividends is subject to the requirements of Delaware law, which generally requires that any dividends must be paid out of our surplus capital or, if there is no surplus capital, out of net profits for the fiscal year in which a dividend is declared and/or the preceding fiscal year. Our ability to pay future dividends will depend upon, among other factors, our cash balances and potential future capital requirements, debt service requirements, earnings, financial condition, the general economic and regulatory climate and other factors beyond our control that our board of directors may deem relevant. Investors should not purchase our common stock with the expectation of receiving cash dividends.

 

Accordingly, as set forth above, we do not expect to pay or declare any further cash dividends on our common stock for the foreseeable future. We expect to retain our future earnings, if any, for use in the operation of our business, including the repayment of our outstanding indebtedness. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the primary way to realize any future gains on their investment. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

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DILUTION

 

If you invest in our common stock (and/or pre-funded warrants) in this offering, your interest will be diluted to the extent of the difference between the public offering price per share and the net tangible book value per share of our common stock after this offering.

 

Our net tangible book value as of September 26, 2020, was approximately $(57,800,000), or $(6.192) per share of our common stock, based upon 9,333,763 shares of our common stock outstanding as of that date. Net tangible book value per share is determined by dividing our total tangible assets, less total liabilities, by the number of shares of our common stock outstanding as of September 26, 2020. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of our common stock immediately after this offering.

 

After giving effect to (i) the refinancing of an aggregate of $35.7 million of debt provided by Jackson pursuant to that certain Amended and Restated Note Purchase Agreement, dated September 15, 2017, including the payment of an amendment fee of approximately $488,000, subsequent to September 26, 2020, (ii) the issuance of 300,000 shares of restricted stock to Brendan Flood as compensations for his services as our director and chief executive officer, of which (A) 100,000 shares vested upon the completion of the refinancing of our debt, (B) 100,000 shares may become vested upon the satisfaction of the minimum stockholders equity requirements of Nasdaq, and (C) 100,000 shares vested upon the closing of the December 2020 Public Offering, subsequent to September 26, 2020, (iii) the issuance of 11,200 shares of common stock to our directors for Board services, subsequent to September 26, 2020, (iv) the issuance of 5,000 shares of common stock awarded to our employees upon the completion of refinancing of our debt, subsequent to September 26, 2020, (iv) the issuance of 4,816,665 shares of our common stock in the December 2020 Public Offering and the receipt of the net proceeds thereof, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us, (v) the issuance of 2,662,596 shares of common stock in the December 2020 Registered Direct Offering and the receipt of the net proceeds thereof, after deducting the placement agent fees and other estimated offering expenses payable by us, (vi) the repayment of $3,029,309 of the Jackson Note, (vi) the redemption of 1,010 shares of our Series E Preferred Stock, (vii) the issuance of 155,000 shares of common stock in January 2021 in accordance with our 2019 Long Term Incentive Plan, and (viii) the redemption of 1,039,380 shares of our Series A Preferred Stock into 27,024 shares of our common stock, our pro forma net tangible book value as of September 26, 2020 would have been approximately $(55,253,000), or $(3.192) per share of common stock.

 

After giving further effect to the sale of the maximum amount of shares of our common stock in this offering at the assumed public offering price of  $1.01 per share, which is the last reported sale price of our common stock on Nasdaq on February 4, 2021, and assuming no sale of pre-funded warrants in this offering, and after deducting the placement agent fees and estimated offering expenses payable by us and using the proceeds from this offering as set forth under “Use of Proceeds” in this prospectus, our pro forma as adjusted net tangible book value as of September 26, 2020 would have been approximately $(40,100,000), or $(1.022) per share of common stock. This represents an immediate increase in pro forma net tangible book value of  $2.169 per share to our existing stockholders, and an immediate dilution of  $2.032 per share to new investors purchasing our common stock in this offering at the public offering price.

 

The following table illustrates this dilution on a per share basis:

 

Assumed public offering price per share      $

1.010

 
Historical net tangible book value per share as of September 26, 2020  $(6.192)     
Increase in net tangible book value per share attributable to the adjustments described above   3.000      
Pro forma net tangible book value per share as of September 26, 2020  $(3.192)     
Increase in pro forma net tangible book value per share attributable to this offering  $ 2.169       
Pro forma as-adjusted net tangible book value per share as of September 26, 2020 after giving further effect to this offering       $

(1.022

)
Dilution in pro forma as-adjusted net tangible book value per share to investors participating in this offering       $ 2.032  

 

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A $0.10 increase in the assumed public offering price of $1.01 per share would increase our pro forma as adjusted net tangible book value after this offering by $1.5 million, or $0.04 per share, and the dilution per share to investors purchasing securities in this offering would be approximately $2.094 per share, assuming that the maximum number of shares of common stock, as set forth on the cover page of this prospectus, remains the same and after deducting the placement agent fees and estimated offering expenses payable by us. Similarly, a $0.10 decrease in the assumed public offering price of $1.01 per share would decrease our pro forma as adjusted net tangible book value after this offering by $1.5 million, or $0.04 per share, and the dilution per share to investors purchasing securities in this offering would be $1.971 per share, assuming that the maximum number of shares of common stock offered by us, as set forth on the cover page of this prospectus remains the same and after deducting the placement agent fees and estimated offering expenses payable by us.

 

We may also increase or decrease the number of shares of common stock we are offering from the assumed maximum number of shares of common stock set forth above. An increase of 100,000 shares of common stock from the assumed maximum number of shares of common stock set forth on the cover page of this prospectus would increase our pro forma as adjusted net tangible book value after this offering by approximately $70,000, or $0.004 per share, and the dilution per share to investors purchasing securities in this offering would be approximately $2.028 per share, assuming that the assumed public offering price remains the same and after deducting the placement agent fees and estimated offering expenses payable by us. Similarly, a decrease of 100,000 shares of common stock from the assumed maximum number of shares of common stock set forth on the cover page of this prospectus would decrease our pro forma as adjusted net tangible book value after this offering by approximately $70,000, or $0.004 per share, and the dilution per share to investors purchasing securities in this offering would be approximately $2.037, assuming that the assumed public offering price remains the same and after deducting the placement agent fees and estimated offering expenses payable by us.

 

The information discussed above is illustrative only and will adjust based on the actual public offering price, the actual number of shares that we offer in this offering, and other terms of this offering determined at pricing. The foregoing discussion and table assumes no sale of pre-funded warrants, which if sold, would reduce the number of common stock that we are offering on an one-for-one basis and does not take into account further dilution to investors in this offering that could occur upon the exercise of outstanding options and warrants having a per share exercise price less than the public offering price per share in this offering.

 

The number of shares of our common stock outstanding was 9,333,763 shares of common stock outstanding as of September 26, 2020 and excludes, as of that date:

 

  76,500 shares of common stock issuable upon exercise of stock options;
     
   27,024 shares of common stock issuable upon conversion of 1,039,380 shares of Series A Preferred Stock, all of which were redeemed following September 26, 2020, with such redemption given effect in the pro forma calculation in the table above;
     
   11,700,000 shares of common stock issuable upon conversion of 11,700 shares of Base Series E Preferred Stock, which includes 1,010 shares of Base Series E Preferred Stock that were converted or redeemed subsequent to September 26, 2020, with such conversion given effect in the pro forma calculation in the table above;
     
   1,219,000 shares of common stock issuable upon conversion of 1,219 shares of Series E-1 Preferred Stock issued as dividends to the holders of the Base Series E Preferred Stock;
     
   1,015,934 shares of common stock issuable upon the exercise of warrants outstanding prior to this offering at a weighted average exercise price of $1.10;
     
   up to 1,354,167 additional shares of common stock issuable upon conversion of shares of Series E-1 Preferred Stock issuable as dividends payable to the holders of our Base Series E Preferred Stock, based on 6,500 shares of preferred stock designated as Series E-1 Preferred Stock pursuant to the Series E Certificate of Designation; and

 

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177,500 shares of common stock issuable pursuant to outstanding performance awards.

 

To the extent that options or warrants outstanding as of September 26, 2020 have been or may be exercised or we issue other shares, investors purchasing securities in this offering may experience further dilution. In addition, we may seek to raise additional capital in the future through the sale of equity or convertible debt securities. To the extent we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

You should read the following discussion and analysis of financial condition and results of operations in conjunction with our financial statements and the related notes thereto included elsewhere in this prospectus. In addition to historical information, the following discussion and analysis includes forward-looking information that involves risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements” included elsewhere in this prospectus.

 

Overview

 

We are an international staffing company engaged in the acquisition of United States and United Kingdom based staffing companies. Our services principally consist of providing temporary contractors, and, to a much lesser extent, the recruitment of candidates for permanent placement. As part of our consolidation model, we pursue a broad spectrum of staffing companies supporting primarily accounting and finance, information technology, engineering, administration and commercial disciplines. Our business model is based on finding and acquiring, suitable, mature, profitable, operating, domestic and international staffing companies. Our targeted consolidation model is focused specifically on the accounting and finance, information technology, engineering, administration and light industrial disciplines. We have completed ten acquisitions since November 2013.

 

All amounts in Management’s Discussion and Analysis of Financial Condition and Results Operation are expressed in thousands, except share, per share and stated value per share data or otherwise indicated.

 

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Business Model, Operating History and Acquisitions

 

As part of our consolidation model, we pursue a broad spectrum of staffing companies supporting primarily accounting and finance, information technology, engineering, administration (collectively, the “Professional Business Stream”) and commercial (“Commercial Business Stream”) disciplines. Our typical acquisition model is based on paying consideration in the form of cash, stock, earn-outs and/or promissory notes. In furthering our business model, we are regularly in discussions and negotiations with various suitable, mature acquisition targets.

 

Results of Operations

 

For nine-month periods ended September 26, 2020 and September 28, 2019

 

   Q3 2020 YTD   % of Revenue   Q3 2019 YTD   % of Revenue   Growth 
Revenue  $150,693    100.0%  $214,644    100.0%   (29.8)%
Cost of revenue   124,168    82.4%   177,949    82.9%   (30.2)%
Gross profit   26,525    17.6%   36,695    17.1%   (27.7)%
Operating expenses   33,890    22.5%   35,173    16.4%   (3.6)%
(Loss) Income from operations   (7,365)   (4.9)%   1,522    0.7%   (583.9)%
Other expenses   (6,283)   (4.2)%   (4,168)   (1.9)%   50.7%
Benefit from income taxes   247    0.2%   296    0.1%   (16.6)%
Net Loss  $(13,401)   (8.9)%  $(2,350)   (1.1)%   470.3%

 

Revenue

 

For nine-month period ended September 26, 2020 (“Q3 2020 YTD”), revenue decreased by 29.8% to $150,693, as compared with $214,644, for nine-month period ended September 28, 2019 (“Q3 2019 YTD”). The decline was driven by $63,881 of organic decline primarily resulting from impact from COVID-19 and $70 unfavorable foreign currency translation. Within organic decline, temporary contractor revenue declined $60,593 and permanent placement declined $3,288.

 

Revenue in Q3 2020 YTD was comprised of $145,150 of temporary contractor revenue and $5,543 of permanent placement revenue, compared with $205,809 and $8,834 for Q3 2019 YTD, respectively.

 

Cost of revenue

 

Cost of services includes the variable cost of labor and various non-variable costs (e.g., workers’ compensation insurance) relating to employees (temporary and permanent) as well as sub-contractors and consultants. For Q3 2020 YTD, cost of revenue was $124,168, a decrease of 30.2% from $177,949 in Q3 2019 YTD, compared with revenue decline of 29.8%. The decline was driven by $59 of unfavorable foreign currency translation and $53,722 of organic decline.

 

Gross profit

 

Gross profit for Q3 2020 YTD was $26,525, a decreased of 27.7% compared with $36,695 in Q3 2019 YTD primarily driven by organic decline resulting from impact from COVID-19.

 

Operating expenses

 

Operating expenses for Q3 2020 YTD were $33,890, a decrease of 3.6% as compared with $35,173 for Q3 2019 YTD. The decrease in operating expenses was driven by primarily by a decrease in selling, general and administrative expenses of $3,943 resulting from cost cutting efforts, decrease in depreciation and amortization of $309; offset by goodwill impairment charge at the Staffing 360 Solutions Georgia LLC, d/b/a firstPRO (“firstPro”) reporting unit of $2,969. Excluding the impairment of goodwill charge at firstPro, operating expenses declined by 12%.

 

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For three-month periods ended September 26, 2020 and September 28, 2019

 

   Q3 2020   % of Revenue   Q3 2019   % of Revenue   Growth 
Revenue  $48,640    100.0%  $67,320    100.0%   (27.7)%
Direct cost of revenue   40,317    82.9%   54,835    81.5%   (26.5)%
Gross profit   8,323    17.1%   12,485    18.5%   (33.3)%
Operating expenses   10,159    20.9%   12,228    18.2%   (16.9)%
(Loss) Income from operations   (1,836)   (3.8)%   257    0.4%   (814.4)%
Other expenses   (923)   (1.9)%   (1,337)   (2.0)%   (31.0)%
Benefit from (Provision for) income taxes   118    0.2%   (28)   (0.0)%   (521.4)%
Net Loss  $(2,641)   (5.4)%  $(1,108)   (1.6)%   138.4%

 

Revenue

 

For three-month period ended September 26, 2020 (“Q3 2020”), revenue decreased by 27.7% to $48,640, as compared with $67,320, for three-month period ended September 28, 2019 (“Q3 2019”). The decline was driven by $781 of favorable foreign currency translation and $19,461 of organic decline. Within organic decline, primarily resulting from impact from COVID-19, temporary contractor revenue declined $17,292 and permanent placement declined $2,169.

 

Revenue in Q3 2020 was comprised of $47,177 of temporary contractor revenue and $1,463 of permanent placement revenue, compared with $63,710 and $3,609 for Q3 2019, respectively.

 

Other Expenses

 

Other expenses for Q3 2020 YTD was $6,283, an increase of 50.8% from $4,168 in Q3 2019 YTD. The increase was mainly driven by higher interest expense and amortization of deferred financing costs in Q3 2020 YTD compared with Q3 2019 YTD of approximately $300 and a gain on settlement of deferred consideration of $1,985 in Q3 2019 YTD.

 

Cost of revenue

 

Cost of services includes the variable cost of labor and various non-variable costs (e.g., workers’ compensation insurance) relating to employees (temporary and permanent) as well as sub-contractors and consultants. For Q3 2020, cost of revenue was $40,317, a decrease of 26.5% from $54,835 in Q3 2019 in line with the revenue decline of 27.7%. The decline was driven by $685 of favorable foreign currency translation and $15,203 of organic decline.

 

Gross profit

 

Gross profit for Q3 2020 was $8,323, a decreased of 33.3% compared with $12,485 in Q3 2019 primarily driven by organic decline, resulting from impact from COVID-19.

 

Operating expenses

 

Operating expenses for Q3 2020 were $10,159, a decrease of 16.9% as compared with $12,228 for Q3 2019. The decrease in operating expenses included a decrease in salaries and wages and reduction in non-recurring costs, legal, and other costs associated with refinancing/acquisitions efforts.

 

Other Expenses

 

Other expenses for Q3 2020 was $923, a decrease of 31% from $1,337 in Q3 2019. The decrease was mainly driven by a gain from remeasuring the Company’s intercompany note in Q3 2020 of $442 compared with loss from remeasuring the Company’s intercompany note in Q3 2019 of $467; gain on divesture of business of $220, lower interest expense and amortization of deferred financing costs in Q3 2020 by $313 as compared with Q3 2019; offset by gain on deferred consideration in Q3 2019 of $1,138.

 

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For the fiscal years ended December 28, 2019 and December 29, 2018

 

   Fiscal 2019   % of Revenue   Fiscal 2018   % of Revenue   Growth 
Revenue  $278,478    100.0%  $260,926    100.0%   6.7%
Cost of revenue   230,169    82.7%   212,622    81.5%   8.3%
Gross profit   48,309    17.3%   48,304    18.5%   0.0%
Operating expenses   47,686    17.1%   46,646    17.9%   2.2%
Income from operations   623    0.2%   1,658    0.6%   62.4%
Other expenses   (5,852)   (2.1)%   (8,137)   (3.1)%   (28.1)%
Benefit (provision) for income taxes   335    0.1%   (22)   (0.0)%   (1622.7)%
Net loss  $(4,894)   (1.8)%  $(6,501)   (2.5)%   (24.7)%

 

Revenue

 

The fiscal year ended December 28, 2019 (“Fiscal 2019”) revenue increased by 6.7% to $278,478 as compared with $260,926 for the fiscal year ended December 29, 2018 (“Fiscal 2018”). Of that growth, $47,167 was from the acquisitions of Clement May Limited (“Clement May”) and Key Resources Inc. (“KRI”). This was partially offset by a decline of $7,653 from divesting of the PeopleServe Inc. and PeopleServe PRS, Inc. (“PeopleServe divestiture”), $5,202 from unfavorable foreign currency translation, and $16,760 of organic revenue decline. Within organic revenue, temporary contractor revenue declined $16,814 and permanent placement grew $482.

 

Revenue in Fiscal 2019 was comprised of $266,974 of temporary contractor revenue and $11,504 of permanent placement revenue, compared with $250,416 and $10,510 for Fiscal 2018, respectively.

 

Cost of revenue, Gross profit and gross margin

 

Cost of revenue includes the variable cost of labor and various non-variable costs (e.g., workers’ compensation insurance) relating to employees (temporary and permanent) as well as sub-contractors and consultants. For Fiscal 2019, cost of revenue was $230,169, an increase of 8.3% from $212,622 in Fiscal 2018, compared with revenue growth of 6.7%.

 

Gross profit for Fiscal 2019 was $48,309, flat versus Fiscal 2018 of $48,304, representing gross margin of 17.3% and 18.5% for each period, respectively. Gross profit growth was primarily attributable to the impact of acquisitions and growth in permanent revenue. This was partly offset by the divestiture of the lower margin PeopleServe business, workers’ compensation insurance savings realized in Fiscal 2018 with no corresponding credit in Fiscal 2019, unfavorable foreign currency translation, and organic contract revenue decline.

 

Operating expenses

 

Operating expenses for Fiscal 2019 were $47,686, an increase of 2.2% over $46,646 for Fiscal 2018. The acquisitions of Clement May and KRI drove an additional increase of 5.7% in operating expense. Excluding the acquisitions, operating expenses decreased by 4.3% driven by lower non-recurring costs, legal, and other costs associated with acquisitions, lower variable costs and savings attributable to synergies within the subsidiaries, cost savings initiatives, and the PeopleServe divesture.

 

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Other Expenses

 

Other expenses for Fiscal 2019 was $5,852, a decrease of 28.1% from $8,137 in Fiscal 2018. The decrease was driven by the following: gain of $1,077 on CBS Butler earnout settlement in Fiscal 2019, $847 gain on settlement of FirstPro Inc. deferred consideration in Fiscal 2019; $383 gain in remeasuring the intercompany note in Fiscal 2019 compared to a loss of $686 in Fiscal 2018; $758 lower interest expense recorded in Fiscal 2019 versus Fiscal 2018 due to the $13 million debt conversion in Fiscal 2018. These were partially offset by a gain of $879 from fair valuing warrants in Fiscal 2018, with no corresponding gain in Fiscal 2019; $238 gain from the PeopleServe divestiture in Fiscal 2018; $277 of higher net amortization of debt discount and deferred financing costs; and lower other income mainly due to a true up adjustment to the CBS Butler Holdings Limited (“CBS Butler”) earnout in Fiscal 2018.

 

Non-GAAP Measures

 

To supplement our consolidated financial statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we also use non-GAAP financial measures and Key Performance Indicators (“KPIs”) in addition to our GAAP results. We believe non-GAAP financial measures and KPIs may provide useful information for evaluating our cash operating performance, ability to service debt, compliance with debt covenants and measurement against competitors. This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be comparable to similarly entitled measures reported by other companies.

 

We present the following non-GAAP financial measure and KPIs in this report:

 

Revenue and Gross Profit by Sector We use this KPI to measure the Company’s mix of Revenue and respective profitability between its two main lines of business due to their differing margins. For clarity, these lines of business are not our operating segments, as this information is not currently regularly reviewed by the chief operating decision maker to allocate capital and resources. Rather, we use this KPI to benchmark us against the industry.

 

The following table details Revenue and Gross Profit by Sector for Q3 2020 and Q3 2019:

 

   Q3 2020   Mix   Q3 2019   Mix   Q3 2020 YTD   Mix   Q3 2019 YTD   Mix 
Commercial Staffing - US  $28,708    59%  $31,644    47%  $79,992    53%  $94,280    44%
Professional Staffing - US   5,188    11%   9,387    14%   19,778    13%   28,449    13%
Professional Staffing - UK   14,744    30%   26,289    39%   50,923    34%   91,915    43%
Total Revenue  $48,640        $67,320        $150,693        $214,644      
                                         
Commercial Staffing - US  $4,642    56%  $5,107    41%  $12,552    47%  $14,823    40%
Professional Staffing - US   1,664    20%   3,701    30%   6,598    25%   10,904    30%
Professional Staffing - UK   2,017    24%   3,677    29%   7,375    28%   10,968    30%
Total Gross Profit  $8,323        $12,485        $26,525        $36,695      
                                         
Commercial Staffing - US   16.2%        16.1%        15.7%        15.7%     
Professional Staffing - US   32.1%        39.4%        33.4%        38.3%     
Professional Staffing - UK   13.7%        14.0%        14.5%        11.9%     
Total Gross Margin   17.1%        18.5%        17.6%        17.1%     

 

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The following table details Revenue and Gross Profit by Section for Fiscal 2019 and Fiscal 2018:

 

   Fiscal 2019   Mix   Fiscal 2018   Mix 
                 
Revenue                    
Commercial Staffing – US  $127,330    46%  $107,318    41%
Professional Staffing – US   37,294    13%   49,752    19%
Professional Staffing – UK   113,854    41%   103,856    40%
Total Service Revenue  $278,478        $260,926      
                     
Gross Profit                    
Commercial Staffing – US  $20,080    42%  $17,496    36%
Professional Staffing – US   14,081    29%   15,610    32%
Professional Staffing – UK   14,148    29%   15,199    32%
Total Gross Profit  $48,309        $48,304      
                     
Gross Margin                    
Commercial Staffing – US   15.8%        16.3%     
Professional Staffing – US   37.8%        31.4%     
Professional Staffing – UK   12.4%        14.6%     
Total Gross Margin   17.3%        18.5%     

 

Adjusted EBITDA This measure is defined as net loss attributable to common stock before: interest expense and amortization of debt discount and financing costs, benefit from (provision for) income taxes; depreciation and amortization, income (loss) from sale of business; impairment of intangible assets and goodwill; operational restructuring and other charges; deferred consideration settlement, re-measurement gain (loss) on intercompany note, other income (loss), net; non-cash expenses associated with stock compensation and incentive plans; and charges we considers to be non-recurring in nature such as legal expenses associated with litigation, professional fees associated potential and completed acquisitions. We use this measure because we believe it provides a more meaningful understanding of our profit and cash flow generation.

 

   Q3 2020   Q3 2019   Q3 2020 YTD   Q3 2019 YTD  

Trailing Twelve Months

Q3 2020

  

Trailing Twelve Months

Q3 2019

 
Net loss  $(2,641)  $(1,108)  $(13,401)  $(2,350)  $(15,945)  $(3,756)
                               
Interest expense and amortization of debt discount and deferred financing costs   1,746    2,059    6,277    5,977    8,784    8,365 
Benefit from (Provision for) income taxes   (118)   28    (247)   (296)   (286)   (196)
Depreciation and amortization   768    867    2,312    2,621    3,061    3,494 
EBITDA  $(245)  $1,846   $(5,059)  $5,952   $(4,386)  $7,907 
                               
Acquisition, capital raising, restructuring charges and other non-recurring expenses (1)   2,073    1,558    4,473    2,511    6,908    2,993 
Other non-cash charges (2)   209    205    555    627    768    834 
Re-measurement (income) loss on intercompany note   (442)   467    348    484    (519)   838 
Gain on business sale   (220)       (220)       (220)    
Deferred consideration settlement       (1,138)       (1,985)   61    (1,985)
Impairment of goodwill           2,969        2,969     
Other loss   (161)   (51)   (122)   (308)   (140)   (536)
Adjusted EBITDA  $1,214   $2,887   $2,944   $7,281   $5,441   $10,051 
                               
Trailing Twelve Months (“TTM”) Adjusted EBITDA            $5,441   $10,051   $5,441   $10,051 
                               
Pre-Acquisition Adjusted EBITDA (3)                     

$

   $ 
                               
Pro Forma TTM Adjusted EBITDA (4)                      $5,441   $10,051 
                               
Adjusted Gross Profit TTM (5)                      $38,139   $49,040 
                               
TTM Adjusted EBITDA as percentage of adjusted gross profit TTM                       14.3%   20.5%

 

(1) Acquisition, capital raising and other non-recurring expenses primarily relate to capital raising expenses, acquisition and integration expenses, restructuring charges, and legal expenses incurred in relation to matters outside the ordinary course of business.

 

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(2) Other non-cash charges primarily relate to staff option and share compensation expense, expense for shares issued to directors for board services, and consideration paid for consulting services.

 

(3) Pre-Acquisition Adjusted EBITDA excludes the Adjusted EBITDA of acquisitions for the period prior to the acquisition date.

 

(4) Pro Forma TTM Adjusted EBITDA includes the Adjusted EBITDA of acquisitions for the period prior to the acquisition date.

 

(5) Adjusted Gross Profit EBITDA excludes gross profit of business divested in June 2018, for the period prior to divested date.

 

Operating Leverage This measure is calculated by dividing the growth in Adjusted EBITDA by the growth in Adjusted Gross Profit, on a trailing 12-month basis. We use this KPI because we believe it provides a measure of our efficiency for converting incremental gross profit into Adjusted EBITDA.

 

   Twelve Months Ended 
   September 26, 2020   September 28, 2019 
Adjusted Gross Profit - TTM (Current Period)  $38,139   $49,040 
Adjusted Gross Profit - TTM (Prior Period)   49,040    47,873 
Adjusted Gross Profit - (Decline) Growth  $(10,901)  $1,167 
           
Adjusted EBITDA - TTM (Current Period)  $5,441   $10,051 
Adjusted EBITDA - TTM (Prior Period)   10,051    9,007 
Adjusted EBITDA - (Decline) Growth  $(4,610)  $1,044 
           
Operating Leverage   -42.3%   89.5%

 

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Leverage Ratio Calculated as Total Debt, Net, gross of any Original Issue Discount, divided by Pro Forma Adjusted EBITDA for the trailing 12-months. We use this KPI as an indicator of our ability to service its debt prospectively.

 

   September 26, 2020   December 28, 2019 
Total Debt, Net  $57,221   $38,816 
Addback: Total Debt Discount and Deferred Financing Costs   32    497 
Total Term Debt  $57,253   $39,313 
           
TTM Adjusted EBITDA  $5,441   $9,778 
           
Pro Forma TTM Adjusted EBITDA  $5,441   $9,778 
           
Pro Forma Leverage Ratio   10.5x   4x

 

Operating Cash Flow Including Proceeds from Accounts Receivable Financing calculated as net cash (used in) provided by operating activities plus net proceeds from accounts receivable financing. Because much of our temporary payroll expense is paid weekly and in advance of clients remitting payment for invoices, operating cash flow is often weaker in staffing companies where revenue and accounts receivable are growing. Accounts receivable financing is essentially an advance on client remittances and is primarily used to fund temporary payroll. As such, we believe this measure is helpful to investors as an indicator of our underlying operating cash flow.

 

On February 8, 2018, CBS Butler, Staffing 360 Solutions Limited and The JM Group, entered into a new arrangement with HSBC Invoice Finance (UK) Ltd (“HSBC”) which provides for HSBC to purchase the subsidiaries’ accounts receivable up to an aggregate amount of £11,500 across all three subsidiaries. The terms of the arrangement provide for HSBC to fund 90% of the purchased accounts receivable upfront and, a secured borrowing line of 70% of unbilled receivables capped at £1,000 (within the overall aggregate total facility of £11,500). The arrangement has an initial term of 12 months, with an automatic rolling three-month extension and carries a service charge of 1.80%. Under ASU 2016-16, “Statement of Cash Flows (Topic 230, Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues Task Force, the upfront portion of the sale of accounts receivable is classified within operating activities, while the deferred purchase price portion (or beneficial interest), once collected, is classified within investing activities. On April 20, 2020, the terms of the loan with HSBC was amended whereby no capital repayments will be made between April 2020 to September 2020, and only interest payments will be made during this time. On May 15, 2020, the Company entered into a 3-year term loan with HSBC in the UK for £1,000.

 

For 3Q 2020 YTD and Q3 2019 YTD

 

   Q3 2020 YTD   Q3 2019 YTD 
Net cash used in operating activities  $(10,918)  $(7,001)
           
Collection of UK factoring facility deferred purchase price   6,830    10,502 
           
Repayments on accounts receivable financing   (4,999)   (3,702)
           
Net cash used in operating activities including proceeds from accounts receivable financing  $(9,087)  $(201)
           

 

For Fiscal 2019 and Fiscal 2018

 

   Fiscal 2019   Fiscal 2018 
         
Net cash flow (used in) provided by operating activities  $(10,840)  $1,971 
           
Collection of UK factoring facility deferred purchase price   13,970    10,448 
           
Repayments on accounts receivable financing   (2,708)   (13,759)
         
Net cash provided by (used in) operating activities including proceeds from accounts receivable financing  $422   $(1,340)

 

The Leverage Ratio and Operating Cash Flow Including Proceeds from Accounts Receivable Financing should be considered together with the information in the “Liquidity and Capital Resources” section, immediately below.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Historically, we have funded our operations through term loans, promissory notes, bonds, convertible notes, private placement offerings and sales of equity.

 

Our primary uses of cash have been for debt repayments, repayment of deferred consideration from acquisitions, professional fees related to our operations and financial reporting requirements and for the payment of compensation, benefits and consulting fees. The following trends may occur as we continue to execute on its strategy:

 

  An increase in working capital requirements to finance organic growth;
     
  Addition of administrative and sales personnel as the business grows;
     
  Increases in advertising, public relations and sales promotions for existing and new brands as we expand within existing markets or enter new markets;
     
  A continuation of the costs associated with being a public company; and
     
  Capital expenditures to add technologies.

 

Our liquidity may be negatively impacted by the significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. We expect all of these applicable rules and regulations could significantly increase our legal and financial compliance costs and increase the use of resources.

 

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The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of us as a going concern. At September 26, 2020, we had unsecured payments due in the next 12 months associated with historical acquisitions and secured current debt arrangements which are in excess of cash and cash equivalents on hand, in addition to funding operational growth requirements. Historically, we have funded such payments either through cash flow from operations or the raising of capital through additional debt or equity. Although we have raised an aggregate of approximately $19,395 through PPP Loan, if we unable to obtain additional capital, such unsecured payments may not be made on time. In September, we applied for forgiveness of the PPP Loan in the aggregate amount equal to $19,395. Additionally, with the continuation of the COVID-19 pandemic, there is further uncertainty related to our future revenues, gross profit and cash flows.

 

The COVID-19 pandemic is impacting worldwide economic activity, and activity in the United States and the United Kingdom where our operations are based. Much of the independent contractor work we provide to our clients is performed at the site of our clients. As a result, we are subject to the plans and approaches of our clients have made to address the COVID-19 pandemic, such as whether they support remote working or if they have simply closed their facilities and furloughed employees. To the extent that our clients were to decide or are required to close their facilities, or not permit remote work when they close facilities, we would no longer generate revenue and profit from that client. In addition, in the event that our clients’ businesses suffer or close as a result of the COVID-19 pandemic, we may experience decline in our revenue or write-off of receivables from such clients. Moreover, developments such as social distancing and shelter-in-place directives have impacted our ability to deploy our staffing workforce effectively, thereby impacting contracts with customers in our commercial staffing and professional staffing business streams, where we had declines in revenues during Q2 2020 and Q3 2020 and may have declines during Q4 2020 compared to the respective periods in 2019. While some government-imposed precautionary measures have been relaxed in certain countries or states, more strict measures have been or may be put in place again due to a resurgence in COVID-19 cases, as has occurred recently in the United Kingdom in response to the spread of a new strain of COVID-19. As a result of the newly imposed government restrictions in the United Kingdom, we had to close both of our offices in the United Kingdom and our employees have been forced to operate remotely from their homes. Therefore, the ongoing COVID-19 pandemic may continue to affect our operation and to disrupt the marketplace in which we operate and may negatively impact our sales in fiscal year 2021 and our overall liquidity.

 

The financial statements included in this prospectus have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lenders will remain available to us.

 

On September 15, 2020, we and certain of our domestic subsidiaries, as guarantors, entered into the Consent and Amendment Agreement (the “Consent and Amendment Agreement”) with Jackson, which amends the Amended and Restated Note Purchase Agreement with Jackson dated September 15, 2017 (the “Existing Note Purchase Agreement”). Pursuant to the Existing Note Purchase Agreement, the stated maturity of the previously issued notes (the “Existing Jackson Notes”) under the Existing Note Purchase Agreement was extended from September 15, 2020 to October 15, 2020.

 

On October 26, 2020, we entered into the Amended Note Purchase Agreement and the Jackson Note, with Jackson, which amended and restated our Existing Note Purchase Agreement, as amended. The Amended Note Purchase Agreement refinanced an aggregate of $35.7 million of debt provided by Jackson pursuant to the Existing Note Purchase Agreement and the Existing Jackson Notes. The entire outstanding principal balance of the Jackson Notes shall be due and payable on September 30, 2022.

 

The Amended Note Purchase Agreement includes certain financial customary covenants and the Company has had in prior periods had instances of non-compliance. Management has historically been able to obtain from Jackson waivers of any non-compliance; however, there can be no assurance that we will be able to obtain such waivers, and should Jackson refuse to provide a waiver in the future, the outstanding debt under the Amended Note Purchase Agreement could become due immediately, which exceeds our current cash balance.

 

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For nine-month periods ended September 26, 2020 and September 28, 2019

 

As of and for the nine-month period ended September 26, 2020, we had a working capital deficiency of $16,440 and accumulated deficit of $89,938, and a net loss of $13,401.

 

During Q3 2020 and on October 26, 2020, we and certain of our domestic subsidiaries entered into amendments to the Credit and Security Agreement to extend the maturity date of the facility from August 8, 2020 to September 1, 2022. For more information, see Note 13 to our unaudited interim financial statements contained elsewhere in this prospectus.

 

On September 24, 2020, we entered into an Asset Purchase Agreement with FirstPro Recruitment, LLC, pursuant to which Staffing 360 Georgia, LLC d/b/a firstPRO, our wholly-owned subsidiary sold to the FirstPro Recruitment, LLC substantially all of Staffing 360 Georgia, LLC’s Assets (the “First Pro Transaction”). In addition, FirstPro Recruitment, LLC assumed certain liabilities related to the Assets. The purchase price in connection with the FirstPro Transaction was $3,300, of which (a) $1,219 was paid at closing (the “Initial Payment”) and (b) $2,080 was held in a separate escrow account (the “Escrow Funds”), which will be released upon receipt of the forgiveness of the PPP Loan by the U.S. Small Business Administration (the “SBA”). In the event that all or any portion of the PPP Loan is not forgiven by the SBA, all or portion of the Escrow Funds will be used to repay any unforgiven portion of the PPP Loan in full. The FirstPro Transaction closed on September 24, 2020. In September, we submitted the PPP Loan forgiveness applications to the SBA. As of the date of this prospectus, the PPP Loans have not been approved for forgiveness, and there is no guarantee that all or portion of the PPP Loan will be forgiven.

 

In connection with execution of the Asset Purchase Agreement, we and certain of our subsidiaries entered into a Consent Agreement (the “Consent”) with Jackson. Under the terms of the Consent and the Series E Certificate of Designation, in consideration for Jackson’s consent to the FirstPro Transaction, the Initial Payment was used to redeem a portion of the Series E Preferred Stock, and the Escrow Funds, subject to the forgiveness of our PPP Loan discussed above, will be used to redeem a portion of the Series E Preferred Stock. For more information, see Note 2 to our unaudited interim financial statements contained elsewhere in this prospectus.

 

Operating activities

 

For Q3 2020 YTD, net cash used in operations of $10,918 was primarily attributable to net loss of $13,401 and changes in operating assets and liabilities totaling $4,860 offset by non-cash adjustments of $7,343. Changes in operating assets and liabilities primarily relates to an increase in accounts receivable of $4,805, decrease in payables and accrued expense of $1,860, decrease in payables to related parties of $871, increase in prepaid expenses and other current assets of $446, offset by decrease in other assets of $390, increase in current liabilities of $192 and increase in long term liabilities and other of $2,540 primarily resulting from FICA deferrals. Total non-cash adjustments of $7,343 primarily includes impairment of goodwill of $2,969, depreciation and amortization of intangible assets of $2,312, bad debt expense of $879, stock-based compensation of $534, amortization of debt discounts and deferred financing of $521 and foreign currency re-measurement loss on intercompany loan of $348 offset by gain on sale of business of $220.

 

For Q3 2019 YTD, net cash used in operations of $7,001 was primarily attributable to changes in operating assets and liabilities totaling $6,921, net loss of $2,350; offset by non-cash adjustments of $2,270. Changes in operating assets and liabilities primarily relates to an increase in accounts receivable of $8,994, increase in prepaid expenses and other current assets of $187, increase other assets of $395, decrease in interest payable to related parties of $190, decrease in other non- current liabilities of $54 and decrease in other long term liabilities and other of $341; offset by increase in accounts payable and accrued expenses of $3,240. Total non-cash adjustments of $2,270 primarily includes depreciation and amortization of intangible assets of $2,621, stock-based compensation of $621, amortization of debt discounts and deferred financing of $529, foreign currency re-measurement on intercompany loan of $484; offset by gain from settlements of the FirstPro and CBS Butler deferred consideration totaling $1,985.

 

Investing activities

 

For Q3 2020 YTD, net cash flows provided by investing activities was $9,904, $6,830 related to collection of the beneficial interest from HSBC, proceeds from sale of business of $3,300 partially offset by purchase of property and equipment of $226.

 

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For Q3 2019 YTD, net cash flows provided by investing activities was $10,087, $10,502 related to collection of the beneficial interest from HSBC partially offset by purchase of property and equipment of $415.

 

Financing activities

 

For Q3 2020 YTD, net cash flows provided by financing activities totaled $10,433 primarily due to proceeds from PPP loans of $19,395, proceeds from HSBC term loan of $1,220 offset by repayments of $4,999 on accounts receivable financing, net, repayment of term loan with Jackson of $2,538, dividends paid to Jackson of $2,480 and repayment on HSBC loan of $165.

 

For Q3 2019 YTD, net cash flows used in financing activities totaled $4,468, of which $3,702 relates to repayments on accounts receivable financing, net, payment on deferred consideration for $5,613, third party financing costs of $1,122, dividends paid to related parties of $1,125, dividends paid to shareholders of $249, and repayment on HSBC loan of $522; financing costs – related party of $188; offset by proceeds from equity raise of $5,515 and proceeds from related party term loan of $2,538.

 

Fiscal 2019 and Fiscal 2018

 

For Fiscal 2019, we had a working capital deficiency of $55,353 an accumulated deficit of $76,537, and a net loss of $4,894.

 

Operating activities

 

For Fiscal 2019, net cash used in operations of $10,840 was primarily attributable to changes in operating assets and liabilities totaling $8,697 and a net loss of $4,894; offset by non-cash adjustments of $2,751. Changes in operating assets and liabilities primarily relates to an increase in accounts receivable of $7,574, increase other assets of $590, decrease in accounts payable and accrued expenses of $1,893, decrease in other current liabilities of $94, decrease in other long term liabilities of $85; offset by increase in accounts payable – related party of $1,114, decrease in prepaid expenses of $367, and other of $58. Noncash add backs of $2,750 primarily relates to amortization of intangible assets and depreciation of $3,369, amortization of debt discount and deferred financing of $857, stock-based compensation of $832; offset by remeasurement gain on intercompany note of $383 and gain on settlement of deferred consideration of $1,924.

 

Cash provided by operations was $1,971 for Fiscal 2018. This is primarily attributable to changes in operating assets and liabilities totaling $4,048, non-cash adjustments of $4,424, partially offset by net loss of $6,501. Changes in operating assets and liabilities primarily relates to a decrease in accounts receivable of $5,141, decrease in prepaids and other current assets of $188, decrease in other assets of $83, increase in other current liabilities of $198 and other of $332, offset by decrease in accounts payable and accrued expenses of $1,456, decrease in related party payables of $184, and decrease in other long term liabilities of $254. Non-cash add backs of $4,424 primarily relate to amortization of intangible assets of $2,536, amortization of debt discount and deferred financing of $580, stock-based compensation of $1,151, depreciation of $588, remeasurement loss on intercompany note of $686, offset by gain from sale of business of $238 and change in fair value of warrant liability of $879.

 

Investing activities

 

For Fiscal 2019, net cash flows provided by investing activities was $13,460, $13,970 related to collection of the beneficial interest from HSBC partially offset by purchase of property and equipment of $510.

 

Net cash flows provided by investing activities for Fiscal 2018 was $1,666 and is due to the acquisitions of Clement May and KRI of $9,760 and purchase of property and equipment of $425; offset by disposal of business, net of $1,403 and the collection of the beneficial interest from HSBC of $10,448.

 

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Financing activities

 

For Fiscal 2019, net cash flows used in financing activities totaled $4,389, of which $2,708 relates to repayments on accounts receivable financing, net, payment on deferred consideration for $6,230, third party financing costs of $1,154, dividends paid to related parties of $1,175, dividends paid to shareholders of $337, and repayment on HSBC loan of $650; financing costs – related party of $188; offset by proceeds from equity raise of $5,515 and proceeds from related party term loan of $2,538.

 

For Fiscal 2018, net cash flows used in financing activities totaled $3,556, of which $13,759 related to proceeds from accounts receivable financing, net, payments for earn outs $1,402, repayment of term loans $596, related party financing costs of $280, third party financing costs of $109, dividends to related parties of $200, offset by proceeds from related party loans of $8,428, proceeds from term loans of $2,047 and proceeds from the At-market facility of $2,315.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

On December 31, 2017, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers for all open contracts and related amendments as of December 31, 2017 using the modified retrospective method. The adoption had no impact to the reported results. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while the comparative information will not be restated and will continue to be reported under the accounting standards in effect for those periods.

 

The Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.

 

The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.

 

The Company has primarily two main forms of revenue – temporary contractor revenue and permanent placement revenue. Temporary contractor revenue is accounted for as a single performance obligation satisfied over time because the customer simultaneously receives and consumes the benefits of the Company’s performance on an hourly basis. The contracts stipulate weekly billing and the Company has elected the “as invoiced” practical expedient to recognize revenue based on the hours incurred at the contractual rate as we have the right to payment in an amount that corresponds directly with the value of performance completed to date. Permanent placement revenue is recognized on the date the candidate’s full-time employment with the customer has commenced. The customer is invoiced on the start date, and the contract stipulates payment due under varying terms, typically 30 days. The contract with the customer stipulates a guarantee period whereby the customer may be refunded if the employee is terminated within a short period of time, however this has historically been infrequent, and immaterial upon occurrence. As such, the Company’s performance obligations are satisfied upon commencement of the employment, at which point control has transferred to the customer.

 

Income Taxes

 

The Company utilizes Accounting Standards Codification (“ASC”) Topic 740, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

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The Company applies the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in the financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of the date of this filing, the Company is current on all corporate, federal and state tax returns. The Company’s policy is to record interest and penalties related to unrecognized tax benefits as income tax expense.

 

Business Combinations

 

In accordance with ASC 805, “Business Combinations”, the Company records acquisitions under the purchase method of accounting, under which the acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values. The Company utilizes management estimates and, in some instances, may retain the services of an independent third-party valuation firm to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration granted. Such estimates and valuations require us to make significant assumptions, including projections of future events and operating performance.

 

Fair Value of Financial Instruments

 

In accordance with ASC 820, “Fair Value Measurements and Disclosures”, the Company measures and accounts for certain assets and liabilities at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, and establishes a framework for measuring fair value and standards for disclosure about such fair value measurements.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

  Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities

 

  Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

 

  Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

Goodwill

 

Goodwill relates to amounts that arose in connection with various acquisitions and represents the difference between the purchase price and the fair value of the identifiable intangible and tangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but it is subject to periodic review for impairment. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, a decline in the equity value of the business, a significant adverse change in certain agreements that would materially affect reported operating results, business climate or operational performance of the business and an adverse action or assessment by a regulator.

 

In accordance with ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment, or ASU 2011-08, the Company is required to review goodwill by reporting unit for impairment at least annually or more often if there are indicators of impairment present. A reporting unit is either the equivalent of, or one level below, an operating segment. The Company early adopted the provisions in ASU 2017-04, which eliminates the second step of the goodwill impairment test. As a result, the Company’s goodwill impairment tests include only one step, which is a comparison of the carrying value of each reporting unit to its fair value, and any excess carrying value, up to the amount of goodwill allocated to that reporting unit, is impaired.

 

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The carrying value of each reporting unit is based on the assignment of the appropriate assets and liabilities to each reporting unit. Assets and liabilities were assigned to each reporting unit if the assets or liabilities are employed in the operations of the reporting unit and the asset and liability is considered in the determination of the reporting unit fair value.

 

Use of Estimates

 

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced the Company may differ materially and adversely from its estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected. Significant estimates for Fiscal 2019 and Fiscal 2018, include the valuation of intangible assets, including goodwill, liabilities associated with earn-out obligations, testing long-lived assets for impairment and valuation reserves against deferred tax assets.

 

Recent Accounting Pronouncements

 

On December 31, 2019, the FASB issued ASC 2019-12 “Income Taxes: Simplifying the Accounting for Income Taxes” (Topic 740). The amendments in this update simplify the accounting for income taxes by removing the certain exceptions. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company will adopt the guidance when it becomes effective.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This standard requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, each reporting entity should estimate an allowance for expected credit losses, which is intended to result in more timely recognition of losses. This model replaces multiple existing impairment models in current U.S. GAAP, which generally requires a loss to be incurred before it is recognized. The new standard applies to trade receivables arising from revenue transactions such as contract assets and accounts receivable. Under ASC 606, revenue is recognized when, among other criteria, it is probable that an entity will collect the consideration it is entitled to when goods or services are transferred to a customer. When trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. This guidance is effective for smaller reporting companies for annual periods beginning after December 15, 2022, including the interim periods in the year. Early adoption is permitted. The Company will adopt the guidance when it becomes effective.

 

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BUSINESS

 

General

 

Staffing 360 Solutions, Inc. was incorporated in the State of Nevada on December 22, 2009, as Golden Fork Corporation, which changed its name to Staffing 360 Solutions, Inc., ticker symbol “STAF”, on March 16, 2012. On June 15, 2017, the Company changed its domicile to the State of Delaware.

 

Business Model and Acquisitions

 

The Company is an international staffing company engaged in the acquisition of United States and United Kingdom based staffing companies. Its services principally consist of providing temporary contractors, and, to a much lesser extent, the recruitment of candidates for permanent placement. As part of its consolidation model, the Company pursues a broad spectrum of staffing companies supporting primarily accounting and finance, information technology, engineering, administration and commercial disciplines. The Company’s business model is based on finding and acquiring, suitable, mature, profitable, operating, domestic and international staffing companies. The Company’s targeted consolidation model is focused specifically on the accounting and finance, information technology, engineering, administration and light industrial disciplines. The Company has completed ten acquisitions since November 2013.

 

Industry Background

 

The staffing industry is divided into three major segments: temporary staffing services, professional employer organizations (“PEOs”) and placement agencies. Temporary staffing services provide workers for limited periods, often to substitute for absent permanent workers or to help during periods of peak demand. These workers, who are often employees of the temporary staffing agency, will generally fill clerical, technical, or industrial positions. PEOs, sometimes referred to as employee leasing agencies, contract to provide workers to customers for specific functions, often related to human resource management. In many cases, a customer’s employees are hired by a PEO and then contracted back to the customer. Placement agencies, sometimes referred to as executive recruiters or headhunters, find workers to fill permanent positions at customer companies. These agencies may specialize in placing senior managers, mid-level managers, technical workers, or clerical and other support workers.

 

The Company considers itself a temporary staffing company within the broader staffing industry. However, the Company provides permanent placements at the request of existing clients and some consulting services clients.

 

Staffing companies identify potential candidates through online advertising and referrals, and interview, test and counsel workers before sending them to the customer for approval. Pre-employment screening can include skills assessment, drug tests and criminal background checks. The personnel staffing industry has been radically changed by the internet. Many employers list available positions with one or several internet personnel sites like www.monster.com or www.careerbuilder.com, and on their own sites. Personnel agencies operate their own sites and often still work as intermediaries by helping employers accurately describe job openings and by screening candidates who submit applications.

 

Major end-use customers include businesses from a wide range of industries such as manufacturing, construction, wholesale and retail. Marketing involves direct sales presentations, referrals from existing clients and advertising. Agencies compete both for customers and workers. Depending on market supply and demand at any given time, agencies may allocate more resources either to finding potential employers or potential workers. Permanent placement agencies work either on a retained or on a contingency basis. Clients may retain an agency for a specific job search or on contract for a specific period. Temporary staffing services charge customers a fixed price per hour or a standard markup on prevailing hourly rates.

 

For many staffing companies, demand is lower late in the fourth calendar quarter and early in the first calendar quarter, partly because of holidays, and higher during the rest of the year. Staffing companies may have high receivables from customers. Temporary staffing agencies and PEOs must manage a high cash flow because they funnel payroll payments from employers. Cash flow imbalances also occur because agencies must pay workers even if they have not been paid by clients.

 

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The revenue of staffing companies depends on the number of jobs they fill, which in turn can depend upon the economic environment. During economic slowdowns, many client companies stop hiring altogether. Internet employment sites expand a Company’s ability to find workers without the help of traditional agencies. Staffing companies often work as intermediaries, helping employers accurately describe job openings and screen candidates. Increasing the use of sophisticated, automated job description and candidate screening tools could make many traditional functions of personnel agencies obsolete. Free social networking sites such as LinkedIn and Facebook are also becoming a common way for recruiters and employees to connect without the assistance of a staffing agency.

 

To avoid large placement agency fees, big companies may use in-house personnel staff, current employee referrals, or human resources consulting companies to find and hire new personnel. Because placement agencies typically charge a fee based on a percentage of the first year’s salary of a new worker, companies with many jobs to fill have a financial incentive to avoid agencies.

 

Many staffing companies are small and may depend heavily on a few big customers for a large portion of revenue. Large customers may lead to increased revenue, but also expose agencies to higher risks. When major accounts experience financial hardships, and have less need for temporary employment services, agencies stand to lose large portions of revenue.

 

The loss of a staff member who handles a large volume of business may result in a large loss of revenue for a staffing company. Individual staff members, rather than the staffing company itself, often develop strong relationships with customers. Staff members who move to another staffing company are often able to move customers with them.

 

Some of the best opportunities for temporary employment are in industries traditionally active in seasonal cycles, such as manufacturing, construction, wholesale and retail. However, seasonal demand for workers creates cash flow fluctuations throughout the year.

 

Staffing companies are regulated by the U.S. Department of Labor and the Equal Employment Opportunity Commission, and often by state authorities. Many federal anti-discrimination rules regulate the type of information that employment firms can request from candidates or provide to customers about candidates. In addition, the relationship between the agency and the temporary employees, or employee candidates may not always be clear, resulting in legal and regulatory uncertainty. PEOs are often considered co-employers along with the client, but the PEO is responsible for employee wages, taxes and benefits. State regulation aims to ensure that PEOs provide the benefits they promise to workers.

 

Trends in the Staffing Business

 

Start-up costs for a staffing company are very low. Individual offices can be profitable, but consolidation is driven mainly by the opportunity for large agencies to develop national relationships with big customers. Some agencies expand by starting new offices in promising markets, but most prefer to buy existing independent offices with proven staff and an existing customer roster.

 

At some companies, temporary workers have become such a large part of the workforce that staffing company employees sometimes work at the customer’s site to recruit, train, and manage temporary employees. The Company has a number of onsite relationships with its customers. Staffing companies try to match the best qualified employees for the customer’s needs, but often provide additional training specific to that company, such as instruction in the use of proprietary software.

 

Some personnel consulting firms and human resource departments are increasingly using psychological tests to evaluate potential job candidates. Psychological or liability testing has gained popularity, in part, due to recent fraud scandals. In addition to stiffer background checks, headhunters often check the credit history of prospective employees.

 

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We believe the trends of outsourcing entire departments and dependence on temporary and leased workers will expand opportunities for staffing companies. Taking advantage of their expertise in assessing worker capabilities, some staffing companies manage their clients’ entire human resource functions. Human resources outsourcing (“HRO”) may include management of payroll, tax filings, and benefit administration services. HRO may also include recruitment process outsourcing (“RPO”), whereby an agency manages all recruitment activities for a client.

 

New online technology is improving staffing efficiency. For example, some online applications coordinate workflow for staffing agencies, their clients and temporary workers, and allow agencies and customers to share work order requests, submit and track candidates, approve timesheets and expenses, and run reports. Interaction between candidates and potential employers is increasingly being handled online.

 

Initially viewed as rivals, some Internet job-search companies and traditional employment agencies are now collaborating. While some Internet sites do not allow agencies to use their services to post jobs or look through resumes, others find that agencies are their biggest customers, earning the sites a large percentage of their revenue. Some staffing companies contract to help client employers find workers online.

 

Competition

 

The Company’s staffing divisions face competition in attracting clients as well as temporary candidates. The staffing industry is highly competitive, with a number of firms offering services similar to those provided by the Company on a national, regional or local basis. In many areas, the local staffing companies are our strongest competitors. The most significant competitive factors in the staffing business are price and reliability of service. The Company believes its competitive advantage stems from its experience in niche markets, and commitment to the specialized employment market, along with its growing global presence.

 

The staffing industry is characterized by a large number of competing companies in a fragmented sector. Major competitors also exist across the sector, but as the industry affords low barriers to entry, new entrants are constantly introduced to the marketplace.

 

The top layer of competitors includes large corporate staffing and employment companies which have yearly revenue of $75 million or more. The next (middle) layer of the competition consists of medium-sized entities with yearly revenue of $10 million or more. The largest portion of the marketplace is the bottom layer of this competitive landscape consisting of small, individual-sized or family-run operations. As barriers to entry are low, sole proprietors, partnerships and small entities routinely enter the industry.

 

Employees

 

The Company employs approximately 201 full-time employees as part of our internal operations. Additionally, the Company employs more than 4,000 individuals that are placed directly with our clients through our various operating subsidiaries.

 

Properties

 

Our headquarters is based in New York, New York. We lease approximately 4,000 square feet of office space.

 

Legal Proceedings

 

From time to time, we may be involved in litigation that arises through the normal course of business. We are currently party to the following material litigation:

 

Whitaker v. Monroe Staffing Services, LLC & Staffing 360 Solutions, Inc.

 

On December 5, 2019, former owner of Key Resources, Inc. (“KRI”), Pamela D. Whitaker (“Whitaker”, “Plaintiff”), filed a complaint in Guilford County, North Carolina (the “North Carolina Action”) asserting claims for breach of contract and declaratory judgment against Monroe Staffing Services LLC (“Monroe”) and the Company (the “Defendants” arising out of the alleged non-payment of certain earn-out payments and interest purportedly due under a Share Purchase Agreement pursuant to which Whitaker sold all issued and outstanding shares in her staffing agency, KRI to Monroe in August 2018. Whitaker is seeking $4,054,000 in alleged damages.

 

Defendants removed the action to the Middle District of North Carolina on January 7, 2020, and Plaintiff moved to remand on February 4, 2020. Briefing on the motion to remand concluded on February 24, 2020. Separately, Defendants moved to dismiss the action on January 14, 2020 based on Plaintiff’s failure to state a claim, improper venue, and lack of personal jurisdiction as to defendant Staffing 360 Solutions, Inc. Alternatively, Defendants sought a transfer of the action to the Southern District of New York, based on the plain language of the Share Purchase Agreement’s forum selection clause. Briefing on Defendants’ motion to dismiss concluded on February 18, 2020. On February 28, 2020, Plaintiff moved for leave to file an amended complaint. Defendants filed their opposition to the motion for leave on March 19, 2020. Plaintiff has filed a reply.

 

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On June 29, 2020, Magistrate Judge Webster issued a Report and Recommendation on the pending motions, recommending that Defendants’ motion to dismiss be granted with regard to Defendants’ request to transfer the matter to the Southern District of New York, and denied in all other regards without prejudice to Defendants raising those arguments again in the new forum. Magistrate Judge Webster also recommended that Plaintiff’s motion to remand be denied and motion to amend be left to the discretion of the Southern District of New York.

 

Plaintiff filed an objection to the Report and Recommendation on July 9, 2020. Defendants responded on July 23, 2020. A decision regarding Plaintiff’s objection, and whether the District Court will accept Magistrate Judge Webster’s recommendations on the motions remains pending.

 

Separately, on February 26, 2020, the Company and Monroe filed an action against Whitaker in the United States District Court for the Southern District of New York (Case No. 1:20-cv-01716) (the “New York Action”). The New York Action concerns claims for breach of contract and fraudulent inducement arising from various misrepresentations made by Whitaker to the Company and Monroe in advance of, and included in, the share purchase agreement. The Company and Monroe are seeking damages in an amount to be determined at trial but in no event less than $6 million. On April 28, 2020, Whitaker filed a motion to dismiss the New York Action on both procedural and substantive grounds. On June 11, 2020, Monroe and the Company filed their opposition to Whitaker’s motion to dismiss. On July 9, 2020 Whitaker filed reply papers in further support of the motion.

 

On October 13, 2020, the Court denied Whitaker’s motion to dismiss, in part, and granted the motion, in part. The Court rejected Whitaker’s procedural arguments, but granted the motion on substantive grounds. However, the Court ordered that Monroe and the Company may seek leave to amend the complaint by letter application by December 1, 2020. Monroe and the Company filed a letter of motion for leave to amend and a proposed Amended Complaint on December 1, 2020. On January 5, 2021, Whitaker filed an opposition to the letter motion. On January 25, 2021, Monroe and the Company filed a reply in further support of the letter motion. A decision on the motion remains pending.

 

Monroe and the Company intend to pursue their claims vigorously.

 

As of the date of this filing, we are not aware of any other material legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, other than as disclosed above.

 

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MANAGEMENT

 

The following table sets forth information regarding our executive officers and the members of our board of directors.

 

Name and Address   Age   Positions
Brendan Flood   55  

Chairman, Chief Executive Officer, President and

Director

Khalid Anwar   57   Senior Vice President of Corporate Finance (Principal Financial Officer and Principal Accounting Officer)
Alicia Barker   50   Chief Operating Officer, Executive Vice President and Director
Dimitri Villard   77   Director
Jeff Grout   67   Director
Nicholas Florio   56   Director

 

Brendan Flood, Chairman, Chief Executive Officer, President and Director. Mr. Flood has been the Chairman or Executive Chairman and a Director of the Company since January 7, 2014. He assumed the role of Chairman and Chief Executive Officer (“CEO”) on December 19, 2017 and has been in the staffing industry for over 20 years. Mr. Flood joined the Company upon the sale of his business, Initio International Holdings Limited (“Initio”), on January 3, 2014, where he was the chairman and chief executive officer, to the Company. He acquired Initio as part of a management buy-out, which he led, in January 2010. Prior to Initio, Mr. Flood worked in several staffing companies including Hudson Global Resources Inc. (“Hudson Global Resources”), which he brought to the Nasdaq National Market on April 1, 2003, as a spin-off from Monsterworldwide Inc. (“Monsterworldwide”). His experience while at Monsterworldwide included numerous M&A transactions, operational management in both London and New York, and various senior financial roles. Mr. Flood graduated from Dublin City University in Ireland with a Bachelor of Arts Degree in Accounting and Finance. Mr. Flood’s strong financial background and years of experience at major staffing firms like Monsterworldwide and Hudson Global Resources qualifies him to be the President and Chief Executive Officer and Chairman of the Board of Directors given the Company’s core business in the staffing industry.

 

Khalid Anwar, Senior Vice President of Corporate Finance. Mr. Anwar joined the Company in February 2020 as Senior Vice President of Corporate Finance. Since December 15, 2020, he has served as the Company’s principal financial officer and principal accounting officer. Mr. Anwar has more than 20 years of experience in finance leadership roles in a variety of industries ranging in size from $20 billion to startups. From 2015 to 2019 he was the Executive, Financial Planning and Analysis, for Element Solutions Inc., a specialty chemicals company. From 2011 to 2015 he was the Chief Financial Officer of Pemco Holdings, an investor/operator of turnkey energy programs. He has an MBA from Booth School of Business at The University of Chicago and is a CPA.

 

Alicia Barker, Chief Operating Officer, Executive Vice President and Director. Alicia Barker has served as a Director of the Company since April 2018 and Executive Vice President and Chief Operating Officer since July 2018. Ms. Barker brings over two decades of extensive human resources, communication and operational expertise to her role. From July 2016 to July 2018, she served as principal and owner of Act II Consulting, providing human resources consulting and professional coaching services to individuals and corporations. From May 2014 to May 2016, Ms. Barker served as senior vice president, Human Resources at Barker, a full-service advertising agency where she led talent procurement and executive development. She also previously served on the executive team as vice president, Human Resources at Hudson North America, a global talent solutions company, as vice president, Human Resources, at Grey Group, a global advertising and marketing agency, and before that, as Human Resources Director at Icon/Nicholson, which designs, develops, and produces prepackaged computer software. Over the past several years, Ms. Barker has held positions on not for profit boards in her local community. Ms. Barker was also solicited to be the Campaign Manager for the Mayoral Campaign in the town of Westfield, NJ during the 2018 election. Ms. Barker’s educational background includes a major in Communications, a SHRM-CP Certification in HR and a Professional Coaching Certification. Ms. Barker’s extensive human resources expertise qualifies her to be a director of the Company.

 

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Dimitri Villard, Director. Dimitri Villard has been a Director of the Company since July 2012. Mr. Villard was chairman and chief executive officer of Peer Media Technologies, Inc., a public company Internet technology business, from February 2009 to December 2012. Peer Media Technologies, Inc. changed its name from ARTISTdirect, Inc. in May 2010. Prior to that, Mr. Villard served as interim chief executive officer from March 6, 2008 and as a director from January 2005 until 2012. Mr. Villard has also served as president and a director of Pivotal BioSciences, Inc., a biotechnology company, from September 1998 to August 2018. In addition, since January 1982, he has served as president and director of Byzantine Productions, Inc. Previously, Mr. Villard was a director at the investment banking firm of SG Cowen and affiliated entities, a position he held from January 1997 to July 1999. From 2004 to 2008, Mr. Villard served as chairman of the board of directors of Dax Solutions, Inc., an entertainment industry digital asset management venture, and from July 2012 until September 2013, he was a member of the board of directors of The Grilled Cheese Truck Company, a public company. He is also a member of the executive committee of the Los Angeles chapter of the Tech Coast Angels, a private venture capital group. Mr. Villard received a Bachelor of Arts from Harvard University and a Master of Science degree from China International Medical University. He is the Chairman of the Company’s Nominating and Corporate Governance Committee and also serves on the Compensation and Human Resources Committee and on the Audit Committee. Mr. Villard’s experience as an officer and/or director of several public companies, as well as an investment banker, qualifies him to be a Director of the Company.

 

Jeff Grout, Director. Jeff Grout has been a Director of the Company since February 2014. He is a successful business speaker, consultant and coach. From 1980 to 2001, he served as U.K. managing director of Robert Half International, a leading international recruitment consultancy, and business manager to Sir Clive Woodward, head coach of the England Rugby Team. From 2001, Mr. Grout has been an independent business consultant specializing in leadership, people management, team building, peak performance, recruitment and retention issues. He has spoken at Henley Business School, Ashridge Management College, Cardiff Business School and the Danish Centre for Leadership, and his clients include Amazon, Deloitte, LinkedIn, British Airways, Barclays, Ernst & Young, Virgin, etc. He holds several corporate advisory and executive coaching appointments and is also a successful business author. Mr. Grout has written books on leadership, recruitment, career success, the psychology of peak performance and his police detective father’s first murder case. His eighth book entitled “What You Need to Know about Leadership” was published in May 2011. Mr. Grout holds a Bachelor of Science (Economics) Degree from the London School of Economics and Political Science. Mr. Grout brings valuable operational experience within the staffing industry having grown the U.K. business of Robert Half International from $1 million to $100 million in sales and from 12 to 365 employees. He also identified and integrated several acquisitions of staffing businesses in the U.K. and continental Europe. He is the Chairman of the Company’s Compensation and Human Resources Committee and serves on the Nominating and Corporate Governance Committee and on the Audit Committee. Mr. Grout’s extensive staffing industry experience, including his role as former Managing Director of Robert Half International, qualifies him to be a director of the Company.

 

Nicholas Florio, Director. Nicholas Florio has been a Director of the Company since May 2014. Mr. Florio provides business consulting and financial advice to a variety of closely held private businesses. He is a retired audit and accounting partner for Citrin Cooperman & Company, LLP (“Citrin Cooperman”). Mr. Florio has been with Citrin Cooperman for over 25 years. He currently serves as a consultant with Citrin Cooperman. With over 30 years of experience in the staffing and employment arena, Mr. Florio served as the practice leader of Citrin Cooperman’s employment and staffing area. Mr. Florio’s experience in this area included providing advice on corporate structuring; design of stock incentive and deferred compensation plans; merger and acquisition due diligence and consulting; among general business and tax advice. He was also a member of the board of directors of both the New York Staffing Association (“NYSA”) and New Jersey Staffing Association and was the president of the Industry Partner Group of NYSA for over 20 years. Prior to his retirement Mr. Florio was also a long-standing member of the Citrin Cooperman’s executive committee. A graduate of Pace University, Mr. Florio is a member of the New York State Society of Certified Public Accountants as well as the American Institute of CPAs. He is the Chairman of the Company’s Audit Committee and serves on the Nominating and Corporate Governance Committee and on the Compensation and Human Resources Committee. Mr. Florio’s acute knowledge of financial and accounting matters, with an emphasis in the staffing industry through his role as audit and accounting partner for Citrin Cooperman, qualifies him to be a director of the Company.

 

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Independence of Directors

 

In determining the independence of our directors, the Board applied the definition of “independent director” provided under the listing rules of The Nasdaq Stock Market LLC. Under the Nasdaq Stock Market LLC, a director will only qualify as an “independent director” if, in the opinion of our Board, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. After considering all relevant facts and circumstances, the Board has determined that each of Messrs. Villard, Florio and Grout are independent within the definition of independence under the Nasdaq Stock Market LLC rules. Our Board has determined that Mr. Flood and Ms. Barker are not independent directors. In making this determination, the Board considered, among other things, (i) relationships and transactions involving directors or their affiliates or immediate family members and (ii) other relationships and transactions involving directors or their affiliates or immediate family members that did not rise to the level of requiring such disclosure, of which there were none.

 

Board Committees

 

Our Board currently has three standing committees: an Audit Committee, a Nominating and Corporate Governance Committee and a Compensation and Human Resources Committee, each of which is described below. All standing committees operate under a charter that has been approved by the Board.

 

Audit Committee. Our Audit Committee is composed of Messrs. Nicholas Florio (Chairman), Dimitri Villard and Jeff Grout. Our Board has determined that each member of our Audit Committee is an independent director under current Nasdaq Stock Market LLC rules and Rule 10A-3 under the Exchange Act, and that each of the members of the Audit Committee is financially sophisticated and is able to read and understand our financial statements. Our Board has also determined that Mr. Florio qualifies as an Audit Committee ‘‘financial expert’’ as defined in Item 407(d)(5) of Regulation S-K and that he has accounting or related financial management expertise as required under the applicable Nasdaq Stock Market LLC rules.

 

Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance Committee is composed of Messrs. Dimitri Villard (Chairman), Nicholas Florio and Jeff Grout. Our Board has determined that each member of our Nominating and Corporate Governance Committee qualifies as an “independent” member of the Board as defined by the rules and regulations of the SEC and Nasdaq Stock Market LLC.

 

Compensation and Human Resources Committee. Our Compensation and Human Resources Committee is composed of Messrs. Jeff Grout (Chairman), Dimitri Villard and Nicholas Florio. Our Board has determined that each member of the Compensation and Human Resources Committee (i) meets the definition of “independence” under the rules and regulations of the SEC and Nasdaq Stock Market LLC and (ii) is a “non-employee director” within the meaning of Rule 16b-3 of the Exchange Act.

 

Involvement in Certain Legal Proceedings

 

There have been no material legal proceedings that would require disclosure under the federal securities laws that are material to an evaluation of the ability or integrity of our directors or executive officers, or in which any director, officer, nominee or principal stockholder, or any affiliate thereof, is a party adverse to us or has a material interest adverse to us.

 

Family Relationships

 

We have no family relationships amongst our directors and executive officers.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

 

Executive Compensation Overview

 

The compensation program for our executive officers, as presented in the Summary Compensation Table below, is administered by our Board and the Compensation and Human Resources Committee of our Board. The intent of our compensation program is to align our executives’ interests with those of our stockholders, while providing reasonable and competitive compensation.

 

The purpose of this Executive Compensation discussion is to provide information about the material elements of compensation that we pay or award to, or that is earned by: (i) the individuals who served as our principal executive officer during fiscal 2020; (ii) our two most highly compensated executive officers, other than the individuals who served as our principal executive officer, who were serving as executive officers, as determined in accordance with the rules and regulations promulgated by the SEC, as of January 2, 2021, with compensation during fiscal year 2020 of $100,000 or more; and (iii) an additional individual for whom disclosure would have been provided pursuant to clause (ii) but for the fact that such individuals were not serving as executive officers on January 2, 2021. We refer to these individuals as our “named executive officers.” For 2020, our named executive officers and the positions in which they served are:

 

Brendan Flood, our Chairman and Chief Executive Officer;

 

Sharnika Viswakula, our former Senior Vice President, Secretary, Treasurer and Corporate Controller;

 

Khalid Anwar, our Senior Vice President of Corporate Finance; and

 

Alicia Barker, our Chief Operating Officer.

 

The named executive officers, including our Chief Executive Officer, do not participate in any part of the process of reviewing and setting their own compensation levels. The Chief Executive Officer acts in an advisory capacity in setting compensation for executives other than himself and defers to the decisions of the Compensation and Human Resources Committee.

 

For 2020, the compensation of our named executive officers consisted of salary, an annual cash bonus and equity awards, as well as benefits such as medical coverage, life insurance and 401(k) contributions.

 

All amounts presented in this section are in whole dollar amounts. All compensation amounts presented in British pounds have been translated using the foreign currency average exchange rates, unless otherwise indicated.

 

Compensation of Executive Officers

 

Summary Compensation Table

 

The following table sets forth the compensation awarded to, earned by or paid to our named executive officers in respect of their services to us for the year ended January 2, 2021 and, where applicable, December 28, 2019.

 

50

 

 

Name and Principal Position 

Fiscal

Year

 

Salary

($)

  

Bonus

($)

  

Stock

Awards (1)

($)

  

All

Other

Compensation

(2)

($)

  

Total

($)

 
Brendan Flood  Fiscal 2020   359,532        369,000    36,377    764,909 
Chairman and Chief Executive Officer  Fiscal 2019   357,202    135,144        33,350    525,696 
Sharnika Viswakula (3)  Fiscal 2020   191,689        3,075    5,907    200,671 
Former Senior Vice President, Secretary, Treasurer and Corporate Controller  Fiscal 2019   175,000    46,298        13,503    234,801 
Khalid Anwar (4)  Fiscal 2020   103,841        3,075        106,916 
Senior Vice President of Corporate Finance  Fiscal 2019                    
Alicia Barker  Fiscal 2020   254,803        3,640    17,400    275,843 
Chief Operating Officer  Fiscal 2019   251,471    92,883    8,246    19,171    371,771 

 

(1) Represents the amount recognized for financial statement reporting purposes in accordance with ASC Topic 718. Stock awards vest in full on the third anniversary of the grant date, and the value of stock award is based upon the fair value of the award at issuance over the vesting term on a straight-line basis. The fair value of the award is calculated by multiplying the number of restricted shares by the Company’s stock price on the date of issuance. The valuation assumptions used in calculating the value of stock awards is set forth in Note 12 to our audited consolidated financial statements included in this prospectus.

 

On October 27, 2020, Mr. Flood, Ms. Viswakula and Mr. Anwar were issued 300,000, 2,500 and 2,500 shares, respectively at $1.23 per share. On January 7, 2020, September 25, 2020 and October 1, 2020, Ms. Barker was issued 1,400 shares at $0.85 per share, 2,800 shares at $0.56 per share and 1,400 shares at $0.63 per share, respectively. On January 7, 2019, April 4,2019, July 2, 2019 and November 18, 2019, Ms. Barker was issued 1,400 shares at $1.79 per share, 1,400 shares at $1.58 per share, 1,400 shares at $1.71 per share and 1,400 shares at $0.84 per share, respectively. 

 

(2) Includes vacation pay, car allowance, 401(k) match, pensions and life insurance premiums.

(3) Ms. Viswakula’s employment with the company ceased as of December 15, 2020.

(4) Mr. Anwar became our Senior Vice President of Corporate Finance on June 29, 2020. He has served as our principal financial officer and principal accounting officer, effective as of December 15, 2020.

 

Employment Agreements

 

The Flood Employment Agreement

 

On January 3, 2014, in connection with our acquisition of Initio, we entered into a services agreement (the “Flood Employment Agreement”) with Brendan Flood. Pursuant to the Flood Employment Agreement, Mr. Flood initially served as Executive Chairman of the Board. Mr. Flood was initially paid a salary of £192,000 per annum, less statutory deductions, plus other benefits including reimbursement for reasonable expenses, paid vacation and insurance coverage for his roles with both the Company and our U.K. subsidiary. Under the Flood Employment Agreement, Mr. Flood’s salary is required to be adjusted (but not decreased) annually in connection with the CPI Adjustment (as defined in the Flood Employment Agreement). Mr. Flood is also entitled to an annual bonus of up to 50% of his annual base salary based reaching certain financial milestones. Additionally, Mr. Flood was entitled to a gross profit appreciation participation, which entitled the participants to 10% of Initio’s “Excess Gross Profit,” which is defined as the increase in Initio gross profits in excess of 120% of the base year’s gross profit, up to $400,000. Mr. Flood’s participating level was 62.5%. On May 29, 2015, the Gross Profit Appreciation Bonus associated with this employment agreement was converted into 1,039,380 shares of Series A Preferred Stock. On January 8, 2021, all of his Series A Preferred Stock were converted into 27,024 shares of our common stock.

 

The Flood Employment Agreement had an initial term of five years and automatically renews thereafter unless 12 months’ written notice is provided by either party. It also includes customary non-compete/solicitation language for a period of 12 months after termination of employment, and in the event of a change in control, we may request that Mr. Flood continue employment with the new control entity. In December 2017, upon the reorganization of the Company and departure of Mr. Briand, Mr. Flood’s title was changed to Chairman and he assumed the roles of Chief Executive Officer and President of the Company. On January 1, 2018 the Company increased his salary by the CPI Adjustment. On January 1, 2019 and on January 1, 2020, Mr. Flood was eligible for a CPI salary adjustment and chose to waive this adjustment. All other terms of the Flood Employment Agreement remained unchanged.

 

The Barker Employment Agreement

 

We entered into an employment agreement with Alicia Barker that appointed her as our Chief Operating Officer effective July 1, 2018 (the “Barker Employment Agreement”). Ms. Barker also serves as a member of our Board and receives stock compensation for her service as a member of the Board.

 

Under the terms of the Barker Employment Agreement, Ms. Barker currently receives an annual base salary of $250,000 and is entitled to receive an annual performance bonus of up to 75% of her base salary based on the achievement of certain performance metrics. Ms. Barker’s base salary is required to be reviewed by the Board on an annual basis and may be increased, but not decreased, in its sole discretion. Ms. Barker is also entitled to reimbursement of certain out-of-pocket expenses incurred in connection with her services to the Company and to participate in the benefit plans generally made available to other executives of the Company.

 

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In the event Ms. Barker is terminated without cause or for good reason (as such terms are defined in the Barker Employment Agreement), she is entitled to receive (subject to certain requirements, including signing a general release of claims): (i) any earned but unpaid base salary and vacation time, as well as unreimbursed expenses, through her termination date; (ii) severance pay in an amount equal to 12 months’ base salary; and (iii) any earned but unpaid performance bonus. In the event Ms. Barker is terminated for cause or without good reason, she is only entitled to receive any earned but unpaid base salary and vacation time, as well as unreimbursed expenses, through her termination date.

 

The Barker Employment Agreement also contains customary confidentiality, non-solicitation and non-disparagement clauses.

 

The Anwar Employment Agreement

 

We entered into an employment agreement with Khalid Anwar that appointed him as our Senior Vice President, Corporate Finance effective June 29, 2020 (the “Anwar Employment Agreement”).

 

Under the terms of the Anwar Employment Agreement, Mr. Anwar currently receives an annual base salary of $200,000 and is entitled to receive an annual performance bonus of up to 50% of his base salary based on the achievement of certain performance metrics. The Anwar Employment Agreement will automatically renew for successive one-year terms after the initial employment term unless terminated by either party upon written notice provided not less than three months before the end of the initial term or renewal term. Mr. Anwar is also entitled to reimbursement of certain out-of-pocket expenses incurred in connection with his services to the Company and to participate in the benefit plans generally made available to other executives of the Company.

 

In the event Mr. Anwar is terminated without cause or for good reason (as such terms are defined in the Anwar Employment Agreement), he is entitled to receive (subject to certain requirements, including signing a general release of claims) (i) any earned but unpaid base salary and vacation time, as well as unreimbursed expenses, through his termination date and (ii) any earned but unpaid performance bonus. In the event Mr. Anwar is terminated for cause or without good reason, he is only entitled to receive any earned but unpaid base salary and vacation time, as well as unreimbursed expenses, through her termination date.

 

The Anwar Employment Agreement also contains customary confidentiality, non-solicitation and non-disparagement clauses.

 

The Viswakula Employment Agreement

 

We entered into an employment agreement with Sharnika Viswakula that appointed her as our Corporate Controller effective November 7, 2016 (the “Viswakula Employment Agreement”).

 

Under the terms of the Viswakula Employment Agreement, Ms. Viswakula received an annual base salary of $170,000 and was entitled to receive an annual performance bonus of up to 35% of her base salary based on the achievement of certain performance metrics. In addition, Ms. Viswakula received 25,000 restricted shares, vesting 50% on her 1st anniversary and 50% on her 2nd anniversary. Ms. Viswakula was also entitled to reimbursement of certain out-of-pocket expenses incurred in connection with her services to the Company and to participate in the benefit plans generally made available to other executives of the Company. On December 31, 2019, upon her appointment of Ms. Viswakula as our principal financial officer and principal accounting officer, her salary was increased to $190,000. In addition, on April 20, 2020, her salary was increased to $200,000. On December 15, 2020 Ms. Viswakula, tendered her resignation from all positions with the Company. Upon her resignation, the Viswakula Employment Agreement was terminated.

 

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Outstanding Equity Awards at January 2, 2021

 

The following table sets forth information concerning the outstanding equity awards for each named executive as of January 2, 2021.

 

Name  Number of securities underlying unexercised options (#) exercisable   Number of securities underlying unexercised options (#) unexercisable   Equity incentive plan awards: Number of securities underlying unexercised unearned options (#)   Option Exercise Price ($)   Option Expiration Date 
   Option awards 
Brendan Flood(1)   6,600(1)       6,600   $100.00     01/07/2024  
    3,000(2)       3,000    50.00     03/01/2025  
    9,600(3)       9,600    6.75     02/28/2027  
Sharnika Viswakula                    
Khalid Anwar                         
Alicia Barker                    

 

(1) These options are fully vested, were issued pursuant to the 2014 Equity Incentive Plan and are exercisable for a period of 10 years from the date of grant.

 

(2) These options are fully vested, were issued pursuant to the 2015 Equity Incentive Plan and are exercisable for a period of 10 years from the date of grant.

 

(3) These options are fully vested, were issued pursuant to the 2016 Equity Incentive Plan and are exercisable for a period of 10 years from the date of grant.

 

Employee Benefits Plans

 

We currently provide broad-based health and welfare benefits that are available to all of our employees, including our named executive officers, including medical, dental, vision, life and disability insurance. In addition, we maintain a 401(k) plan, under which eligible employees may elect to defer their current eligible compensation, subject to the limits imposed by the Internal Revenue Code. The 401(k) plan also provides that we will make company matching contributions equal to 100% of each employee’s elective deferrals up to 3% of base salary, plus 50% of each employee’s elective deferrals between 3% and 5% of base salary. Other than the 401(k) plan, we do not provide any qualified or non-qualified retirement or deferred compensation benefits to our employees, including our named executive officers.

 

Compensation of Directors